10K 9.30.2014
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
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ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2014
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-12613
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ROCK-TENN COMPANY
(Exact Name of Registrant as Specified in Its Charter)
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Georgia | | 62-0342590 |
(State or Other Jurisdiction of | | (I.R.S. Employer |
Incorporation or Organization) | | Identification No.) |
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504 Thrasher Street, Norcross, Georgia | | 30071 |
(Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (770) 448-2193
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Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Name of Exchange on Which Registered |
Class A Common Stock, par value $0.01 per share | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
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 ¨ No ý
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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
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 registrant’s 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. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x | | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The aggregate market value of the common equity held by non-affiliates of the registrant as of March 31, 2014, the last day of the registrant’s most recently completed second fiscal quarter (based on the last reported closing price of $52.79 per share of Class A Common Stock as reported on the New York Stock Exchange on such date), was approximately $7,424 million.
As of November 7, 2014, the registrant had 140,051,129 shares of Class A Common Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on January 30, 2015, are incorporated by reference in Parts II and III.
ROCK-TENN COMPANY
INDEX TO FORM 10-K
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Glossary of Terms
The following terms or acronyms used in this Form 10-K are defined below:
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Term or Acronym | | Definition |
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2004 Incentive Stock Plan | | Amended and Restated 2004 Incentive Stock Plan |
A/R Sales Agreement | | As defined on p. 33 |
AFMC | | Alternative fuel mixture credits |
AGI In-Store | | A.G. Industries, Inc. |
Antitrust Litigation | | As defined on p. 18 |
APBO | | Accumulated postretirement benefit obligation |
ASC | | FASB’s Accounting Standards Codification |
ASU | | Accounting Standards Update |
BSF | | Billions of square feet |
CBAs | | Collective bargaining agreements |
CBPC | | Cellulosic biofuel producers credits |
CEO | | Chief Executive Officer |
CERCLA | | The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 |
CFO | | Chief Financial Officer |
Code | | The Internal Revenue Code of 1986, as amended |
Common Stock | | Our Class A common stock, par value $0.01 per share |
containerboard | | Linerboard and corrugating medium |
Credit Agreement EBITDA | | As defined on p. 70 |
Credit Facility | | Our unsecured Amended and Restated Credit Agreement |
EBITDA | | Earnings before interest, taxes, depreciation and amortization |
EPA | | U.S. Environmental Protection Agency |
ERISA | | Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations thereunder |
ESPP Plan | | The 1993 Employee Stock Purchase Plan, as amended and restated |
Exchange Act | | Securities Exchange Act of 1934, as amended |
Exchanged Notes | | As defined on p. 69 |
FASB | | Financial Accounting Standards Board |
FIFO | | First-in first-out inventory valuation method |
FIP | | Funding improvement plan |
GAAP | | Generally accepted accounting principles in the U.S. |
GHG | | Greenhouse gases |
GMI | | GMI Group |
Guarantor Subsidiaries | | Certain of our 100% owned domestic subsidiaries |
IRS | | Internal Revenue Service |
Leverage Ratio | | The ratio of our total funded debt less certain amounts of unrestricted cash, to Credit Agreement EBITDA, as defined in the Credit Facility, for the preceding four fiscal quarters |
LIBOR | | The London Interbank Offered Rate |
LIFO | | Last-in first-out inventory valuation method |
MACT | | Maximum Achievable Control Technology |
March 2019 Notes | | $350.0 million aggregate principal amount of 4.45% senior notes due March 2019 |
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Term or Acronym | | Definition |
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March 2020 Notes | | $350.0 million aggregate principal amount of 3.50% senior notes due March 2020 |
March 2022 Notes | | $400.0 million aggregate principal amount of 4.90% senior notes due March 2022 |
March 2023 Notes | | $350.0 million aggregate principal amount of 4.00% senior notes due March 2023 |
MEPPs | | Multiemployer pension plans |
Mid South | | Mid South Packaging LLC |
MMSF | | Millions of square feet |
Non-Guarantor Subsidiaries | | The consolidated subsidiaries of the Company that are not guarantors of the guaranteed notes |
NOV | | Notice of Violation |
NPG | | NPG Holding, Inc. |
Obligations | | As defined on p. 86 |
OSHA | | The Occupational Safety and Health Act |
Our Notes | | The March 2019 Notes, March 2020 Notes, March 2022 Notes and March 2023 Notes |
Parent | | Rock-Tenn Company |
Pension Act | | Pension Protection Act of 2006 |
Pension Offer | | As defined on p. 11 |
PRPs or PRP | | Potentially responsible parties |
PSD | | Prevention of Significant Deterioration |
Receivables Facility | | Our receivables backed financing facility |
RP | | Rehabilitation plan |
SEC | | Securities and Exchange Commission |
Securities Act | | The Securities Act of 1933, as amended |
Seven Hills | | Seven Hills Paperboard LLC |
SERP | | Supplemental executive retirement plan |
SG&A | | Selling, general and administrative expenses |
Smurfit-Stone | | Smurfit-Stone Container Corporation |
Smurfit-Stone Acquisition | | Our May 27, 2011 acquisition of Smurfit-Stone |
Supplemental Plans | | Supplemental retirement savings plans |
Tacoma Mill | | The Simpson Tacoma Kraft Paper Mill |
TNH | | Timber Note Holdings LLC |
USW | | United Steelworkers Union |
U.S. | | United States |
PART I
Unless the context otherwise requires, “we”, “us”, “our”, “RockTenn” and “the Company” refer to the business of Rock-Tenn Company, its wholly-owned subsidiaries and its partially-owned consolidated subsidiaries.
General
We are one of North America's leading providers of packaging solutions and manufacturers of containerboard and paperboard. We operate locations in the United States, Canada, Mexico, Chile, Argentina and Puerto Rico.
In the first quarter of fiscal 2014, we announced a realignment of our operating responsibilities and a related change to our segments for financial reporting purposes. Following the realignment we now report our results of operations in the following four reportable segments: Corrugated Packaging, consisting of our containerboard mills and our corrugated converting operations; Consumer Packaging, consisting of our coated and uncoated paperboard mills and consumer packaging converting operations; Merchandising Displays, consisting of our display and contract packaging services; and Recycling, which consists of our recycled fiber brokerage and collection operations. We have reclassified our results for all periods presented herein. For additional information and segment financial information, see “Note 17. Segment Information” of the Notes to Consolidated Financial Statements included herein.
Products
Corrugated Packaging Segment
We are one of the largest producers of containerboard measured by tons produced and one of the largest producers of high graphics preprinted linerboard in North America. We operate an integrated system that manufactures primarily containerboard, corrugated sheets, corrugated packaging and preprinted linerboard for sale to consumer and industrial products manufacturers and corrugated box manufacturers. We produce a full range of high-quality corrugated containers designed to protect, ship, store and display products made to our customers' merchandising and distribution specifications. We also convert corrugated sheets into corrugated products ranging from one-color protective cartons to graphically brilliant point-of-purchase packaging. Our corrugated container plants serve local customers and large national accounts. Corrugated packaging is used to provide protective packaging for shipment and distribution of food, paper, health and beauty and other household, consumer, commercial and industrial products. Corrugated packaging may also be graphically enhanced for retail sale, particularly in club store locations. We provide customers with innovative packaging solutions to advertise and sell their products. We also provide structural and graphic design, engineering services and custom, proprietary and standard automated packaging machines, offering customers turn-key installation, automation, line integration and packaging solutions. To make corrugated sheet stock, we feed linerboard and corrugating 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. Our containerboard mills and corrugated container operations are integrated with the majority of our containerboard production used internally by our corrugated container operations. The balance is either used in trade swaps with other manufacturers or sold domestically and internationally. Sales of corrugated packaging products to external customers accounted for 68.4%, 68.6% and 65.7% of our net sales in fiscal 2014, 2013 and 2012, respectively.
Consumer Packaging Segment
We operate paperboard mills and consumer packaging converting operations. Our consumer packaging converting operations include folding carton converting operations as well as our 65% owned solid fiber interior packaging converting operations. We operate an integrated system of recycled mills and a bleached paperboard mill that produce paperboard for our converting operations and third parties. We believe we operate one of the largest and lowest cost 100% coated recycled paperboard mill systems in North America as measured by tons produced. We manufacture bleached paperboard and market pulp at our Demopolis, AL mill and believe it 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. Our Seven Hills joint venture manufactures gypsum paperboard liner for sale to our joint venture partner. We internally consume or sell our coated recycled and bleached paperboard to manufacturers of folding cartons and other paperboard products. We internally consume or sell our specialty recycled paperboard to manufacturers of solid fiber interior packaging, tubes and cores, book covers and other paperboard products.
We are one of the largest manufacturers of folding cartons in North America and believe we are the largest manufacturer of solid fiber partitions in North America measured by net sales. Our folding cartons are used to package food, paper, health and
beauty and other household consumer, commercial and industrial products primarily for retail sale. 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 cartons to customer specifications and ship finished cartons to customers for assembling, filling and sealing. We employ a broad range of offset, flexographic, gravure, backside printing, coating and finishing technologies and support our customers with new package development, innovation and design services and package testing services. We manufacture and sell our solid fiber and corrugated partitions and die-cut paperboard components principally to glass container manufacturers and producers of beer, food, wine, spirits, cosmetics and pharmaceuticals and to the automotive industry. Sales of consumer packaging products to external customers accounted for 19.7%, 19.6% and 20.5% of our net sales in fiscal 2014, 2013 and 2012, respectively.
Merchandising Displays Segment
We believe we are the largest manufacturer of temporary promotional point-of-purchase displays in North America measured by net sales. We manufacture and assemble (pack out) temporary and permanent point-of-purchase displays. We design, manufacture and, in many cases, pack temporary displays for sale to consumer products companies and retailers. 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 and product manipulation such as multipacks and onpacks. We manufacture and distribute point of sale material utilizing litho, screen, and digital printing technologies. We manufacture lithographic laminated packaging for sale to our customers that require packaging with high quality graphics and strength characteristics. Sales of merchandising display products to external customers accounted for 8.4%, 6.9% and 7.0% of our net sales in fiscal 2014, 2013 and 2012, respectively.
Recycling Segment
We believe we are one of the largest paper recyclers in North America. Our recycling operations provide substantially all of the recycled fiber to our mills and we sell to third parties. Our recycling operations procure recovered paper (also known as recycled fiber) from our converting facilities and from third parties such as factories, warehouses, commercial printers, office complexes, grocery and retail stores, document storage facilities, paper converters and 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. We operate recycling facilities that collect, sort, grade and bale recovered paper and after sorting and baling, we transfer it to our mills for processing, or sell it, principally to U.S. manufacturers of paperboard or containerboard as well as manufacturers of tissue, newsprint, roofing products and insulation and to export markets. We also collect aluminum and plastics for resale to manufacturers of these products. Our waste services business arranges recycling and waste disposal services for its customers. We operate a nationwide fiber marketing and brokerage system that serves large regional and national accounts as well as our recycled paperboard and containerboard mills and sells scrap materials from our converting businesses and mills. Brokerage contracts provide bulk purchasing, often resulting in lower prices and cleaner recovered paper. Many of our recycling facilities are located close to our recycled paperboard and containerboard mills, ensuring availability of supply with reduced shipping costs. Sales to external customers accounted for 3.5%, 4.9% and 6.8% of our net sales in fiscal 2014, 2013 and 2012, respectively.
Raw Materials
The primary raw materials that our mill operations use are recycled fiber at our recycled paperboard and recycled containerboard mills and virgin fibers from hardwoods and softwoods at our virgin containerboard and bleached paperboard mills. Some of our virgin containerboard is manufactured with some recycled content. Recycled fiber prices and virgin fiber prices can fluctuate significantly. While virgin fiber prices have generally been more stable than recycled fiber prices, they also fluctuate, particularly during prolonged periods of heavy rain or during housing construction slowdowns.
Recycled and virgin paperboard and containerboard are the primary raw materials that our converting operations use. One of the two primary grades of virgin paperboard, coated unbleached kraft, used by our folding carton operations, has only two domestic suppliers. 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 converting operations' needs for recycled paperboard and containerboard from our own mills and through the use of trade swaps with other manufacturers, which allow us to optimize our mill system and reduce freight costs. Our converting operations also consume approximately half of our bleached
paperboard production, although we have the capacity to consume substantially all of our bleached paperboard by displacing outside purchases. Because there are other suppliers that produce the necessary grades of recycled and bleached paperboard and containerboard used in our converting operations, we believe that should we incur production disruptions for recycled or bleached paperboard or containerboard we would be able to source significant replacement quantities from other suppliers. However, 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.
Energy
Energy is one of the most significant costs of our mill operations. The cost of natural gas, coal, oil and electricity at times has fluctuated significantly. In our recycled paperboard mills, we use primarily natural gas and electricity, supplemented with fuel oil and coal to generate steam used in the paper making process and to operate our recycled paperboard machines. In our virgin fiber mills, we use wood by-products (biomass), natural gas, coal and fuel oil to generate steam used in the paper making process, to generate some or all of the electricity used on site and to operate our paperboard machines. We use primarily electricity and natural gas to operate our converting facilities. We generally purchase these products from suppliers at market or tariff rates. See Item 1. “Business — Governmental Regulation — Environmental Regulation” for additional information regarding our project to build a new fluidized bed biomass boiler at our Demopolis, AL bleached paperboard mill as well as other energy related spending.
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 and intermodal) and freight rates, which are influenced by supply and demand and fuel costs.
Sales and Marketing
Our top 10 external customers represented approximately 15% of consolidated net sales in fiscal 2014, 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. In fiscal 2014, products sold to our top 10 customers by segment represented 17%, 24%, 63% and 36% of our external sales in our Corrugated Packaging segment, Consumer Packaging segment, Merchandising Displays segment and Recycling segment, respectively.
During fiscal 2014, we sold approximately half of our coated recycled paperboard mills’ production and bleached paperboard production to internal customers, primarily to manufacture folding cartons, and we sold approximately two-thirds of our containerboard production, including trade swaps and buy/sell transactions, to internal customers to manufacture corrugated 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. Excluding the Seven Hills production previously described and our Aurora, IL production converted into book covers and other products, we supply approximately two-fifths of our specialty mills’ production to internal customers, primarily to manufacture interior partitions. Our mills’ sales volumes may therefore be directly impacted by changes in demand for our packaging products.
We market our products primarily through our own sales force. We also market a number of our products through independent sales representatives, independent distributors or both. We generally pay our sales personnel a base salary plus commissions. We pay our independent sales representatives on a commission basis. We discuss foreign net sales to unaffiliated customers and other non-U.S. operations financial and other segment information in “Note 17. Segment Information” of the Notes to Consolidated Financial Statements included herein.
Competition
The packaging products, paperboard and containerboard industries are highly competitive, and no single company dominates any of those industries. Our paperboard and containerboard operations compete with integrated and non-integrated national and regional companies operating in North America that manufacture various grades of paperboard and containerboard and, to a limited extent, manufacturers outside of North America. Our competitors include large and small, vertically integrated packaging products companies that manufacture paperboard or containerboard and numerous smaller non-integrated companies. In the corrugated packaging and folding carton 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 recycled fiber brokerage and collection operations compete with various other companies for the procurement and supply of recovered paper, including brokers and companies that export recovered paper to international markets.
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, the award of new business or the renewal of business at substantially different terms from larger customers may have a significant impact on our results of operations.
The primary competitive factors in the packaging products and paperboard and containerboard 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 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 mill production and converted products pursuant to 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 or containerboard index prices. The effect of these contractual provisions generally is to either limit the amount of the increase or decrease or delay the realization of announced price increases or decreases.
The packaging products, recycled paperboard and containerboard industries have undergone consolidation. Within the packaging products industry, larger corporate customers with an expanded geographic presence have tended to seek suppliers who can, because of their broad geographic presence, efficiently and economically supply all or a range of their customers’ packaging needs. In addition, purchasers of paperboard, containerboard and packaging products continue to demand higher quality products meeting stricter quality control requirements. These market trends could adversely affect our results of operations or, alternatively, benefit our results of operations depending on our competitive position in specific product lines.
Our packaging products compete with plastic, corrugated packaging and packaging made from other materials. Customer shifts away from paperboard and containerboard 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 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 in an effort 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
Environmental compliance requirements are a significant factor affecting our business. We employ processes in the manufacture of pulp, paperboard and other products which result in various discharges, emissions and wastes. These processes are subject to numerous federal, state, local and foreign environmental laws and regulations. We operate and expect to continue to operate, under environmental permits and similar authorizations from various governmental authorities that regulate such discharges, emissions and wastes. Environmental programs in the U.S. are primarily established, administered and enforced at the federal level by the EPA. In addition, many of the jurisdictions in which we operate have adopted equivalent or more stringent environmental laws and regulations or have enacted their own parallel environmental programs.
In 2004, the EPA promulgated a MACT regulation that established air emissions standards and other requirements for industrial, commercial and institutional boilers. The rule was challenged by third parties in litigation, and in 2007, the U.S. Court of Appeals for the D.C. Circuit issued a decision vacating and remanding the rule to the EPA. Under court order, the EPA published a set of four interrelated rules in March 2011, commonly referred to as Boiler MACT. The EPA also published notice in March 2011 that it would reconsider certain aspects of Boiler MACT in order to address “difficult technical issues” raised during the public comment period. On December 20, 2012, the EPA took final action on its proposed reconsideration of certain provisions of the March 2011
Boiler MACT rules. The Boiler MACT reconsideration rules included certain adjustments based on the EPA’s review of existing and new data provided after the March 2011 standards were issued. For the Company’s boilers where capital may be necessary for compliance, the final December 2012 rule requires compliance by January 31, 2016, subject to a possible one-year extension. Several environmental, industry and other groups have filed legal challenges to the December 2012 final Boiler MACT rules. We cannot predict with certainty how any of the legal challenges will impact our Boiler MACT strategies and costs.
Certain jurisdictions in which the Company has manufacturing facilities or other investments have taken actions to address climate change. In the U.S., the EPA has issued the Clean Air Act permitting regulations applicable to certain facilities that emit GHG. However, on June 23, 2014, the U.S. Supreme Court issued a decision holding that the EPA may not treat GHG emissions as an air pollutant for purposes of determining whether a source is a major source required to obtain a PSD or Title V permit. The Supreme Court also said that the EPA could continue to require that PSD permits otherwise required based on emissions of conventional pollutants contain limitations on GHG emissions based on the application of Best Available Control Technology. The EPA is continuing to examine the implications of the Supreme Court’s decision, including how the EPA will need to revise its permitting regulations and related impacts to state programs. The EPA also has promulgated a rule requiring facilities that emit 25,000 metric tons or more of carbon dioxide equivalent per year to file an annual report of their emissions. Some U.S. states and Canadian provinces in which RockTenn has manufacturing operations are also taking measures to reduce GHG emissions. For example, Quebec, has become a member of the Western Climate Initiative, which is a collaboration among California and certain Canadian provinces, Mexican states and tribes that have joined together to create a cap-and-trade program to reduce GHG emissions. On November 18, 2009, Quebec adopted a target of reducing GHG emissions by 20% below 1990 levels by 2020. In December 2011, Quebec issued a final regulation establishing a regional cap-and-trade program that required reductions in GHG emissions from covered emitters as of January 1, 2013. Enactment of the Quebec cap-and-trade program may require expenditures to meet required GHG emission reduction requirements in future years. Such requirements also may increase energy costs above the level of general inflation and result in direct compliance and other costs. However, we do not believe that compliance with the requirements of the new cap-and-trade program will have a material adverse effect on our operations or financial condition. We have systems in place for tracking the GHG emissions from our energy-intensive facilities, and we carefully monitor developments in climate change laws, regulations and policies to assess the potential impact of such developments on our operations and financial condition.
In addition to Boiler MACT and GHG standards, the EPA has finalized a number of other environmental rules that may impact the pulp and paper industry, including National Ambient Air Quality Standards for nitrogen oxide, sulfur dioxide and fine particulate matter. The EPA is also revising existing environmental standards and developing several new rules that may apply to the industry in the future. We cannot currently predict with certainty how any future changes in environmental laws, regulations and/or enforcement practices will affect our business; however, it is possible that our compliance with new environmental standards may require substantial additional capital expenditures and/or operating costs could increase materially.
On October 1, 2010, our Hopewell, VA containerboard mill received a NOV from EPA Region III alleging certain violations of regulations that require treatment of kraft pulping condensates. We strongly disagree with the assertion of the violations in the NOV and are currently engaged in settlement negotiations regarding the matters alleged in the NOV. We believe that any potential fine relating to those matters will not have a significant adverse effect on our results of operations, financial condition or cash flows. We also are involved in various other administrative proceedings relating to environmental matters that arise in the normal course of business. Although the ultimate outcome of such matters cannot be predicted with certainty and we cannot at this time estimate any reasonably possible losses based on available information, management does not believe that the currently expected outcome of any environmental proceedings and claims that are pending or threatened against us will have a material adverse effect on our results of operations, financial condition or cash flows.
We also face potential liability under CERCLA and analogous state laws as a result of releases, or threatened releases, of hazardous substances into the environment from various sites owned and operated by third parties at which Company-generated wastes have allegedly been deposited. Generators of hazardous substances sent to off-site disposal locations at which environmental problems exist, as well as the owners of those sites and certain other classes of persons, all of whom are referred to as PRPs and are, in most instances, subject to joint and several liability for response costs for the investigation and remediation of such sites under CERCLA and analogous state laws, regardless of fault or the lawfulness of the original disposal. Liability is typically shared with other PRPs and costs are commonly allocated according to relative amounts of waste deposited and other factors.
On January 26, 2009, Smurfit-Stone and certain of its subsidiaries filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. Smurfit-Stone’s Canadian subsidiaries also filed to reorganize in Canada. We believe that matters relating to previously identified third party PRP sites and certain facilities formerly owned or operated by Smurfit-Stone have been or will be satisfied claims in the Smurfit-Stone bankruptcy proceedings. However, we may face additional liability for cleanup activity at sites that existed prior to bankruptcy discharge, but are not currently identified. Some of these liabilities may be satisfied from existing bankruptcy reserves. We may also face liability under CERCLA and analogous state and other laws at other ongoing and
future remediation sites where we may be a PRP. In addition to the above mentioned sites, certain of our current or former locations are being studied or remediated under various environmental laws and regulations. Based on current facts and assumptions, we do not believe that the costs of these projects will have a material adverse effect on our results of operations, financial condition or cash flows. However, the discovery of additional contamination or the imposition of additional obligations at these or other sites in the future could result in additional costs.
We believe that we can assert claims for indemnification pursuant to existing rights we have under settlement and purchase agreements in connection with certain of our existing remediation sites. However, there can be no assurance that we will be successful with respect to any claim regarding these indemnification rights or that, if we are successful, any amounts paid pursuant to the indemnification rights will be sufficient to cover all our costs and expenses. We also cannot predict with certainty whether we will be required to perform remediation projects at other locations, and it is possible that our remediation requirements and costs could increase materially in the future and exceed current reserves. In addition, we cannot currently assess with certainty the impact that future federal, state or other environmental laws, regulations or enforcement practices will have on our results of operations, financial condition or cash flows.
We estimate that we will spend approximately $115 million for capital expenditures during fiscal 2015 in connection with matters relating to environmental compliance, including anticipated expenditures on Boiler MACT and the Demopolis biomass boiler project. The expenditures in fiscal 2015 includes the current year portion of our estimated $55 million total investment to complete our Boiler MACT projects at our containerboard mills as well as the continued work on our Demopolis, AL bleached paperboard mill project to build a new fluidized bed biomass boiler that will replace two 1950s power boilers and address the Boiler MACT requirements at the mill. The Demopolis project has been expanded to add a gas package boiler to provide steam and non-condensable gas incineration backup capability for the mill. The expanded project has a total estimated cost of $89 million and is expected to start-up in fiscal 2016. It is possible that our capital expenditure assumptions may change, project completion dates may change, and our Boiler MACT projections are subject to change due to items such as the finalization of ongoing engineering and implementation work, EPA determinations on Boiler MACT implementation issues and the outcomes of pending legal challenges to the rules.
Patents and Other Intellectual Property
We hold a substantial number of patents and pending patent applications in the U.S. and foreign countries. Our patent portfolio consists primarily of utility and design patents relating to our products and manufacturing operations. It also includes exclusive rights to substantial proprietary packaging system technology in the U.S. obtained under license from OTOR S.A. Our brand name and logo, and certain of our products and services, are protected by domestic and foreign trademark rights. Some of our more important marks are: AngelCote®, AngelBrite®, CartonMate®, Millennium®, MillMask®, BlueCuda®, EcoMAX®, Clik Top®, Hi-Tech®, Bio-Pak®, Bio-Plus®, Bio-Plus Earth®, Fold-Pak®, Smartserv®, CaseMate®, CitruSaver®, WineGuard®, Pop-N-Shop®, RockSolid®, Meta®, Meta Tray-8®, Meta Wrap-8®, DuraTote®, and DuraFreeze®. Our patents and trademarks have various expiration dates through 2028. Our patents, trademarks and other intellectual property rights, particularly those relating to our corrugated container, folding carton, interior packaging and display operations, are important to our operations as a whole.
Employees
At September 30, 2014, we had approximately 26,600 employees. Of these employees, approximately 19,100 were hourly and approximately 7,500 were salaried. Approximately 12,200 of our hourly employees are covered by collective bargaining agreements, which most frequently have three or four year terms. Approximately 4,000 of our employees are working under expired contracts and approximately 1,700 of our employees are covered under CBAs that expire within one year.
While we have experienced isolated work stoppages in the past, we have been able to resolve them and we believe that working relationships with our employees are generally good. While the terms of our CBAs may vary, we believe the material terms of the agreements are customary for the industry, the type of facility, the classification of the employees and the geographic location covered thereby.
We entered into a master agreement with the USW that applies to substantially all of our facilities represented by the USW. The agreement has a six year term and covers a number of specific items, including wages, medical coverage and certain other benefit programs, substance abuse testing and successorship. Individual facilities will continue to have local agreements for subjects not covered by the master agreement and those agreements will continue to have staggered terms. Wage increases specified in the master agreement will not begin until the local facility agreements have been negotiated and ratified. The master agreement covers 54 of our U.S. facilities and approximately 7,000 of our employees.
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 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, our nominating and corporate governance committee, and our finance 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. Any amendments to, or waiver from, any provision of the codes will be posted on the Company's website at the address above. 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
Statements in this report that do not relate strictly to historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on our current expectations, beliefs, plans or forecasts and use words such as will, estimate, anticipate, plan, may, believe, project, intend, or expect, or refer to future time periods, and include statements made in this report regarding, among other things: our estimate for our capital expenditures in fiscal 2015 and that we expect our capital investment to continue in a similar range for the next three years, as well as amounts and timing of specific projects (including in connection with matters relating to environmental compliance, such as anticipated expenditures on Boiler MACT and the Demopolis biomass boiler project); our total multi-year estimated Boiler MACT capital investment at our containerboard mills; our expectation that we have more opportunities in our mill system to improve the productivity and cost structure, including projects such as converting to a carbonate caustic pulping process at our Stevenson, AL containerboard mill which is expected to improve yield and reduce cost; our belief that we have significant opportunity to improve our performance via capital investment in our box plant system, the most prominent investments being in the converting equipment in our box plants; our belief that our strong balance sheet and cash flow provide us the flexibility to continue to invest to sustain and improve our operating performance; our belief that the Quebec cap-and-trade program may require expenditures to meet required GHG emission reduction requirements in future years; the amounts of our anticipated contributions to our qualified and supplemental defined benefit pension plans in fiscal 2015 and the range of contributions in fiscal 2016 through 2018 and fiscal 2019; our expectation that buyer-specific synergies will be achieved with respect to the acquisition of NPG and AGI In-Store (e.g., enhanced reach of the combined organization and increased vertical integration); our expectation that buyer-specific synergies will be achieved with respect to the acquisition of Mid-South and GMI (e.g., enhanced geographic reach of the combined organization and increased vertical integration); our belief that the acquisitions of AGI In-Store support our strategy to provide a more holistic portfolio of innovative in-store marketing solutions; our belief that we have significant opportunity to improve our performance via capital investment in our box plant system; our expectation that we will make an election under section 338(h)(10) of the Code that will increase our tax basis in the acquired assets of AGI In-Store for an as yet to be determined amount not to exceed $2.0 million; our expectation that buyer-specific synergies will arise after the acquisition of the Tacoma Mill (e.g., enhanced reach of the combined organization and synergies) and its assembled work force; our belief that NPG provides a broad range of display products and services to many of the most recognized retailers and their innovative retail solutions and large-format printing capability expands our customer base and significantly improves our ability to provide retail insights, innovation and connectivity to all of our customers; our expectation that we will continue to make contributions to our pension plans in the coming years in order to ensure that our funding levels remain adequate in light of projected liabilities and to meet the requirements of the Pension Act and other regulations; our belief that certain MEPPs in which we participate have material unfunded vested benefits; although the plan data for fiscal 2014 is not yet available, we would expect to continue to exceed 5% of total plan contributions to certain MEPPs; our expectations to partially settle obligations under certain of our defined benefit pension plans through lump sum payments to certain eligible former employees including the timing thereof (the “Pension Offer”); our estimate that former employees representing approximately $150 million to $175 million of aggregate pension benefit obligation will accept the Pension Offer in fiscal 2015, our estimate that we expect to complete the second and final phase of the lump sum settlements in the first quarter of fiscal 2015 and incur an estimated $15.0 million to $25.0 million pre-tax charge subject to the percentage of former employees that accept the offer and other factors; our expectation that we will not be required to make additional contributions into these plans related to the Pension Offer; our expectation that each impacted plan’s funded status will remain materially unchanged as a result of the Pension Offer; a current annualized dividend of $0.75 per share on our Common Stock; our expectation that in the first half of fiscal 2015 we will complete a project under which we have been systematically identifying, counting and valuing the parts at mills acquired in the Smurfit-Stone Acquisition; our anticipation that we will be able to fund our capital expenditures, interest payments, dividends and stock repurchases, pension payments, working capital needs, note repurchases, restructuring activities, repayments of current portion of long-term debt and other corporate actions for the foreseeable future from
cash generated from operations, borrowings under our Credit Facility and Receivables Facility, proceeds from our A/R Sales Agreement, proceeds from the issuance of debt or equity securities or other additional long-term debt financing, including new or amended facilities; the effect of a hypothetical 10% increase on the prices of various commodities, freight and energy; our belief that our future estimates or assumptions used to estimate allowances will not materially change; that we expect our cash tax payments to be materially less than our income tax expense in fiscal 2015, significantly lower in fiscal 2016 and similar in fiscal 2017; that we expect to utilize our remaining CBPC, Alternative Minimum Tax and other U.S. federal credits and foreign net operating losses primarily over the next two years; that, as we have utilized nearly all of our U.S. federal net operating losses in fiscal 2014, we expect to receive increased tax benefits from a greater domestic manufacturer’s deduction which is limited by federal taxable income after the use of federal net operating losses while state net operating losses and credits will be used over a longer period of time; our expectation that our effective tax rate in fiscal 2015 will be approximately 34% to 36%, excluding the impact of discrete items; our expectation that the AGI In-Store, Tacoma Mill, GMI and Mid South’s goodwill and intangibles will be amortizable for income tax purposes; our belief that integration activities related to the Smurfit-Stone Acquisition will continue into fiscal 2015; our results of operations, financial condition, cash flows, liquidity or capital resources, including expectations regarding sales growth, income tax rates, our production capacities and our ability to achieve operating efficiencies; 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; 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; our belief that the currently expected outcome of any environmental proceeding or claim that is pending or threatened against us with respect to our Hopewell, VA containerboard mill will not have a material adverse effect on our results of operations, financial condition or cash flows; the expectation that the expanded Demopolis project will start-up in fiscal 2016; our belief that we have properly contained asbestos and/or have trained our employees in an effort to ensure that no rules or regulations are violated in the maintenance of our facilities where asbestos is present; the impact of any gain or loss of a customer’s business; our expectations surrounding credit loss rates; the impact of announced price increases; the scope, costs, timing and impact of any restructuring of our operations and corporate and tax structure including our expectation that the integration of closed facility’s assets and production with other facilities will enable the receiving facilities to better leverage their fixed costs; 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; pension and retirement plan asset investment strategies; potential liability for outstanding guarantees and indemnities and the potential impact of such liabilities; 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 investments in derivative instruments, and the risk of counterparty nonperformance, and factors affecting those risks; our expectation to continue to operate under environmental permits and similar authorizations from various governmental authorities that regulate discharges, emissions and wastes; 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 financial instruments and other assets and liabilities; 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; our recording of net deferred tax assets to the extent we believe such assets are more likely than not to be realized; our expectation that we will close our Cincinnati, OH specialty recycled paperboard mill in the first quarter of fiscal 2015; the Antitrust Litigation and other lawsuits and claims arising out of the conduct of our business; our belief that should we incur production disruptions for recycled or bleached paperboard or containerboard we would be able to source significant replacement quantities from other suppliers; and our expectation that, based on our current stock compensation awards, ASU 2014-12 and ASU 2014-08 will not have a material effect on our consolidated financial statements.
With respect to these statements, we have made assumptions regarding, among other things, economic, competitive and market conditions; volumes and price levels of purchases by customers; competitive conditions in our businesses; possible adverse actions of our customers, our competitors and suppliers; labor costs; the amount and timing of capital expenditures, including installation costs, project development and implementation costs, severance and other shutdown costs; restructuring costs; utilization of real property that is subject to the restructurings due to realizable values from the sale of such property; credit availability; volumes and price levels of purchases by customers; raw material and energy costs; and competitive conditions in our businesses.
You should not place undue reliance on any forward-looking statements as such statements involve risks, uncertainties, assumptions and other factors that could cause actual results to differ materially, including the following: the level of demand for our products; our ability to successfully identify and make performance improvements; anticipated returns on our capital investments; our ability to achieve benefits from acquisitions and the timing thereof, including synergies, performance
improvements and successful implementation of capital projects; our belief that matters relating to previously identified third party PRP sites and certain formerly owned facilities of Smurfit-Stone have been or will be satisfied claims in the Smurfit-Stone bankruptcy proceedings; the level of demand for our products; our belief that we can assert claims for indemnification pursuant to existing rights we have under settlement and purchase agreements in connection with certain of our existing environmental remediation sites; our ability to successfully identify and make performance improvements; anticipated returns on our capital investments; uncertainties related to planned mill outages or production disruptions, including associated costs and the length of those outages; the possibility of unplanned mill outages; investment performance, discount rates, return on pension plan assets and expected compensation levels; market risk from changes in, including but not limited to, interest rates and commodity prices; possible increases in energy, raw materials, shipping and capital equipment costs; any reduction in the supply of raw materials; fluctuations in selling prices and volumes; intense competition; the potential loss of certain customers; the timing and impact of AFMC and CBPC; the impact of operational restructuring activities, including the cost and timing of such activities, the size and cost of employment terminations, operational consolidation, capacity utilization, cost reductions and production efficiencies; estimated fair values of assets, and returns from planned asset transactions, and the impact of such factors on earnings; potential liability for outstanding guarantees and indemnities and the potential impact of such liabilities; the impact of economic conditions, including the nature of the current market environment, raw material and energy costs and market trends or factors that affect such trends, such as expected price changes, competitive pricing pressures and cost increases, as well as the impact and continuation of such factors; our results of operations, including operational inefficiencies, costs, sales growth or declines, the timing and impact of customer transitioning, the impact of price increases or decreases and the impact of the gain and loss of customers; pension plan contributions and expense, funding requirements and earnings; environmental law liability as well as the impact of related compliance efforts, including the cost of required improvements and the availability of certain indemnification claims; capital expenditures; the cost and other effects of complying with governmental laws and regulations and the timing of such costs; the scope, and timing and outcome of any litigation, including the Antitrust Litigation (as hereinafter defined) 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; income tax rates, future deferred tax expense and future cash tax payments; future debt repayment; our ability to fund capital expenditures, interest payments, dividends and stock repurchases, pension payments, working capital needs, note repurchases, repayments of current portion of long term debt and other corporate actions for the foreseeable future from cash generated from operations, borrowings under our Credit Facility and Receivables Facility, proceeds from our A/R Sales Agreement, proceeds from the issuance of debt or equity securities or other additional long-term debt financing, including new or amended facilities; our estimates and assumptions regarding our contractual obligations and the impact of our contractual obligations on our liquidity and cash flow; the impact of changes in assumptions and estimates underlying accounting policies; the expected impact of implementing new accounting standards; the impact of changes in assumptions and estimates on which we based the design of our system of disclosure controls and procedures; the expected cash tax payments that may change due to changes in taxable income, tax laws or tax rates, capital expenditures or other factors; the occurrence of severe weather or a natural disaster, such as a hurricane, tropical storm, earthquake, tornado, flood, fire, or other unanticipated problems such as labor difficulties, equipment failure or unscheduled maintenance and repair, which could result in operational disruptions of varied duration; adverse changes in general market and industry conditions and other risks, uncertainties and factors discussed in Item 1A. “Risk Factors.” The information contained herein speaks as of the date hereof and we do not have or undertake any obligation to update such information as future events unfold.
We are subject to certain risks and events that, if one or more of them occur, could adversely affect our business, our results of operations, financial condition, cash flows and/or the trading price of our Common Stock. In evaluating us, our business and an investment in our securities, you should consider the following risk factors, in addition to the other information presented in this report, as well as the other reports and registration statements we file from time to time with the SEC. The risks below are not the only ones we face. Additional risks not currently known to us or that we currently deem immaterial could also adversely impact our business in the future.
• We May Face Increased Costs and Reduced Supply of Raw Materials and Energy
Historically, the costs of recovered paper and virgin fiber, 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. Certain published indexes contribute to price setting. Future changes in how these indexes are established or maintained could impact pricing. Furthermore, there has been a substantial increase in demand for U.S. sourced recovered paper by Asian countries. These increasing demands have resulted in, and may result in further, cost increases. While the cost of virgin fiber has historically been less volatile than recycled fiber, it also fluctuates, particularly during prolonged periods of heavy rain or during housing construction slowdowns. Recycled and virgin paperboard and containerboard are the primary raw materials that our converting operations use. One of the two primary
grades of virgin paperboard, coated unbleached kraft, used by our folding carton operations, has only two domestic suppliers. 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. At times, the cost of natural gas, which we use in many of our manufacturing operations, including many of our mills, and other energy costs (including energy generated by burning natural gas, fuel oil and coal) have 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, virgin fiber or other raw materials or of natural gas, fuel oil, coal or other energy through price increases for our products. Further, a reduction in availability of recovered paper, virgin paperboard, virgin fiber or other raw materials or energy sources 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, containerboard and converted products industries historically have experienced significant fluctuations in selling prices. Certain published indexes contribute to the setting of selling prices. Future changes in how these indexes are established or maintained could impact selling prices. If we are unable to maintain the selling prices of products within these industries, that inability may have a material adverse effect on our results of operations and financial condition. We are not able to predict with certainty future 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 financial 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 and small, vertically integrated packaging products, paperboard and containerboard companies and numerous non-integrated smaller companies. We generally compete with companies operating in North America. Competition from domestic or foreign lower cost 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, or the renewal of business with less favorable terms, may have a significant impact on our results of operations. Further, competitive conditions may prevent us from fully recovering increased costs and may inhibit our ability to pass on cost increases to our customers. Customer shifts away from paperboard and containerboard packaging to packaging from other materials could adversely affect our results of operations. Our mills’ sales volumes may be directly impacted by changes in demand for our packaging products. See Item 1. “Business — Competition” and “Business — Sales and Marketing.”
• 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 segment’s sales and, depending on the significance of the loss, our results of operations, financial condition or cash flows. See Item 1. “Business — Competition” and “Business — Sales and Marketing.”
• We May Incur Business Disruptions
We take measures to minimize the risks of disruption at our facilities. The occurrence of a natural disaster, such as a hurricane, tropical storm, earthquake, tornado, severe weather, flood, fire, or other unanticipated problems such as labor difficulties, equipment failure or unscheduled maintenance could cause operational disruptions of varied duration. Disruptions at our suppliers could lead to short term or longer rises in raw material or energy costs and/or reduced availability of materials or energy. These types of disruptions could materially adversely affect our earnings to varying degrees dependent upon the facility, the duration of the disruption, our ability to shift business to another facility or find alternative sources of materials or energy. 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 Adversely Affected by Current Economic and Financial Market Conditions
Our businesses may be affected by a number of factors that are beyond our control such as general economic and business conditions, changes in tax laws or tax rates and conditions in the financial services markets including counterparty risk, insurance carrier risk, rising interest rates, inflation, deflation, fluctuations in the value of local currency versus the U.S. dollar or the impact of a stronger U.S. dollar may negatively impact our ability to compete. Macro-economic challenges, including conditions in financial and capital markets and levels of unemployment, and the ability of the U.S. and other countries to deal with their rising
debt levels may continue to put pressure on the economy or lead to changes in tax laws or tax rates. There can be no assurance that changes in tax laws or tax rates will not have a material impact on our future cash taxes, effective tax rate, or deferred tax assets and liabilities. Changes in the U.S., and to a lesser extent the global economy, could drive an increase or decrease in the demand for our products that could increase or decrease our revenues, increase or decrease our manufacturing costs and ultimately increase or decrease our results of operations, financial condition and cash flows. As a result of negative changes in the economy, customers, vendors or counterparties may experience significant cash flow problems or cause consumers of our products to postpone or refrain from spending in response to adverse economic events or conditions. If customers are not successful in generating sufficient revenue or cash flows or are precluded from securing financing, they may not be able to pay or may delay payment of accounts receivable that are owed to us or we may experience lower sales volumes. We are not able to predict with certainty market conditions, and our business could be materially and adversely affected by these market conditions.
• We May be Unable to Successfully 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, realize the anticipated synergies and business opportunities or expand into new markets. There can also be no assurance that future acquisitions will not have an adverse effect upon our operating results, or that the terms of the acquisition debt financing and our increased indebtedness following an acquisition, as well as any potential underfunded pension and postretirement liabilities of the acquired operations, may have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions. 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. Our business may be affected by a number of factors that are beyond our control such as general economic conditions or business risks associated with macro-economic challenges, including, without limitation, potential turmoil in financial, capital and equity markets and high levels of unemployment. Should these types of conditions and risks occur with sufficient severity, there can be no assurance that such changes would not materially impact the carrying value of our goodwill.
• We are Subject to Extensive and Costly 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, including items such as air and water quality, the cleanup of contaminated soil and groundwater and matters related to the health and safety of employees.
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 climate change initiatives, including initiatives such as regulations on emissions from certain industrial boilers, and government’s enforcement practices will have on our operations or capital expenditure requirements. Further, we have been identified as a PRP at various third-party disposal sites pursuant to U.S. federal or state statutes. There can be no assurance that any liability we may incur in connection with these or other sites at which we may be identified in the future as a responsible party or in connection with other governmental requirements, including capital investments or business disruptions associated with regulatory compliance, will not be material to our results of operations, financial condition or cash flows. See Item 1. “Business — Governmental Regulation.”
• We May Incur Additional Restructuring Costs
We have restructured portions of our operations from time to time and it is possible that we may engage in additional restructuring initiatives. 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 trucks or rail cars 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.
• Work Stoppages and Other Labor Relations Matters May Have an Adverse Effect on Our Financial Results
A significant number of our employees in North America are governed by CBAs. Expired contracts are in the process of renegotiation. We may not be able to successfully negotiate new union contracts without work stoppages or labor difficulties or renegotiate without unfavorable terms. If we are unable to successfully renegotiate the terms of any of these agreements or an industry association is unable to successfully negotiate a national agreement when they expire, or if we experience any extended interruption of operations at any of our facilities as a result of strikes or other work stoppages, our results of operations and financial condition could be materially and adversely affected. See Item 1. “Business — Employees” for information regarding employees working under expired contracts and employees covered under CBAs that expire within one year.
• We May Incur Increased Employee Benefit Costs, Our Underfunded Pension Plans Will Require Additional Cash Contributions and We May Incur Increased Funding Requirements in the MEPPs in Which We Participate
Employee healthcare costs in recent years have continued to rise. The Patient Protection and Affordable Care Act has resulted in significant healthcare cost increases. 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, fixed income and alternative investments. Fluctuations in market performance of these assets 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, our discount rate, expected compensation levels or mortality could also increase or decrease pension costs. Future pension funding requirements, and the timing of funding payments, may also be subject to changes in legislation. During 2006, Congress passed the Pension Act with the stated purpose of improving the funding of U.S. private pension plans. The Pension Act imposes stricter funding requirements, introduces benefit limitations for certain underfunded plans and requires underfunded pension plans to improve their funding ratios within prescribed intervals based on the level of their underfunding. We have made contributions to our pension plans and expect to make substantial contributions in the coming years in order to ensure that our funding levels remain adequate in light of projected liabilities and to meet the requirements of the Pension Act, Canadian pension requirements and other regulations. There can be no assurance that such changes, including turmoil in financial and capital markets, will not be material to our results of operations, financial condition or cash flows.
At September 30, 2014, the underfunded liability of our qualified and supplemental executive retirement defined benefit pension plans determined in accordance with GAAP was approximately $1.1 billion. We will likely be required to make significant cash contributions to these plans under applicable U.S. and Canadian laws over the next several years in order to meet future funding requirements and satisfy current service obligations under the plans. These contributions will significantly impact future cash flows that might otherwise be available for repayment of debt, capital expenditures, and other corporate purposes. The actual required amounts and timing of future cash contributions will be highly sensitive to changes in the applicable discount rates and returns on plan assets, and could also be impacted by future changes in the laws and regulations applicable to plan funding. There can be no assurance that such changes, including turmoil in financial and capital markets, will not be material to our results of operations, financial condition or cash flows. See Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Cash Flow Activity.”
We participate in several MEPPs administered by labor unions that provide retirement benefits to certain union employees in accordance with various CBAs. As one of many participating employers in these plans, we are generally responsible with the other participating employers for any plan underfunding. Our contributions to a particular MEPP are established by the applicable CBAs; however, our required contributions may increase based on the funded status of an MEPP and legal requirements such as those of the Pension Act, which requires substantially underfunded MEPPs to implement a funding improvement plan or a rehabilitation plan to improve their funded status. We believe that certain of the MEPPs in which we participate have material unfunded vested benefits. Due to uncertainty regarding future factors that could trigger a withdrawal liability, including partial withdrawal liabilities triggered by facility closures, as well as the absence of specific information regarding matters such as the MEPP's current financial situation due in part due to delays in reporting, the potential withdrawal or bankruptcy of other contributing employers, the impact of future plan performance or the success of current and future funding improvement or rehabilitation plans to restore solvency to the plans, we are unable to determine with certainty the amount and timing of any future withdrawal liability, changes in future funding obligations or the impact of increased contributions including those that could be triggered by a mass withdrawal of other employers from a MEPP. There can be no assurance that the impact of increased contributions, future funding obligations or future withdrawal liabilities will not be material to our results of operations, financial condition or cash flows.
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• | We are Subject to Cyber-Security Risks Related to Certain Customer, Employee, Vendor or Other Company Data |
We use information technologies to securely manage operations and various business functions. We rely upon various technologies to process, store and report on our business and interact with customers, vendors and employees. Our systems are subject to repeated attempts by third parties to access information or to disrupt our systems. Despite our security design and
controls, and those of our third party providers, we could become subject to cyber-attacks which could result in operational disruptions or the misappropriation of sensitive data. There can be no assurance that such disruptions or misappropriations and the resulting repercussions will not be material to our results of operations, financial condition or cash flows.
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• | Our Success Is In Part Dependent On Our Ability To Develop and Successfully Introduce New Products and to Acquire and Retain Intellectual Property Rights |
Our ability to develop and successfully market new products and to develop, acquire, and retain necessary intellectual property rights is important to our continued success and competitive position. If we were unable to protect our existing intellectual property rights, develop new rights, or if others developed similar or improved technologies there can be no assurance that such events would not be material to our results of operations, financial condition or cash flows.
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Item 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable – there are no unresolved SEC staff comments.
We operate locations in the U.S. (37 states), Canada, Mexico, Chile, Puerto Rico and Argentina. We own our principal executive offices in Norcross, Georgia. We believe that our existing production capacity is adequate to serve existing demand for our products and consider our plants and equipment to be in good condition.
Our corporate and operating facilities as of September 30, 2014 are summarized below:
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| | | | | | | | |
| Number of Facilities |
Segment | Owned | | Leased | | Total |
Corrugated Packaging | 81 |
| | 32 |
| | 113 |
|
Consumer Packaging | 36 |
| | 11 |
| | 47 |
|
Merchandising Displays | 7 |
| | 17 |
| | 24 |
|
Recycling | 19 |
| | 4 |
| | 23 |
|
Corporate | 1 |
| | 5 |
| | 6 |
|
Total | 144 |
| | 69 |
| | 213 |
|
The table that follows shows annual production capacity by mill at September 30, 2014 in thousands of tons and excludes the Cincinnati, OH specialty recycled paperboard mill that we expect to close in the first quarter of fiscal 2015. Although our mill system operating rates may vary from year to year due to changes in market and other factors, our simple average mill system operating rates for the last three years averaged 95%. We own all of our mills.
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| | | | | | | | | | | | | | |
Location of Mill | Linerboard | Medium | Coated Recycled Paperboard | Bleached Paperboard | Specialty Recycled Paperboard | Market Pulp | Total Capacity |
Fernandina Beach, FL | 930 |
| | | | | | 930 |
|
West Point, VA | 715 |
| 185 |
| | | | | 900 |
|
Stevenson, AL | | 885 |
| | | | | 885 |
|
Hodge, LA | 825 |
| | | | | | 825 |
|
Solvay, NY | 533 |
| 272 |
| | | | | 805 |
|
Florence, SC | 683 |
| | | | | | 683 |
|
Panama City, FL | 336 |
| | | | | 292 |
| 628 |
|
Seminole, FL | 402 |
| 198 |
| | | | | 600 |
|
Hopewell, VA | 527 |
| | | | | | 527 |
|
Tacoma, WA | 425 |
| | | | | 60 |
| 485 |
|
La Tuque, QC | 345 |
| | | 131 |
| | | 476 |
|
Demopolis, AL | | | | 350 |
| | 100 |
| 450 |
|
St. Paul, MN | | 200 |
| 168 |
| | | | 368 |
|
Coshocton, OH | | 310 |
| | | | | 310 |
|
Uncasville, CT | | 165 |
| | | | | 165 |
|
Battle Creek, MI | | | 160 |
| | | | 160 |
|
Chattanooga, TN | | | | | 140 |
| | 140 |
|
Dallas, TX | | | 127 |
| | | | 127 |
|
Sheldon Springs, VT (Missisquoi Mill) | | | 111 |
| | | | 111 |
|
Lynchburg, VA | | | | | 103 |
| | 103 |
|
Stroudsburg, PA | | | 80 |
| | | | 80 |
|
Eaton, IN | | | | | 64 |
| | 64 |
|
Aurora, IL | | | | | 32 |
| | 32 |
|
Total Mill Capacity | 5,721 |
| 2,215 |
| 646 |
| 481 |
| 339 |
| 452 |
| 9,854 |
|
In the preceding annual production capacity by mill table, our linerboard capacity includes 1,335 tons of white top linerboard. The production at our Lynchburg, VA mill is gypsum paperboard liner and the paper machine is owned by our Seven Hills joint venture. Our fiber sourcing for our mills is approximately 55% virgin and 45% recycled.
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Item 3. | LEGAL PROCEEDINGS |
In late 2010, Smurfit-Stone was one of nine U.S. and Canadian containerboard producers named as defendants in a lawsuit alleging that these producers violated the Sherman Act by conspiring to limit the supply and fix the prices of containerboard from mid-2005 through November 8, 2010 (“Antitrust Litigation”). RockTenn CP, LLC, as the successor to Smurfit-Stone, is a defendant with respect to the period after Smurfit-Stone's discharge from bankruptcy in June 30, 2010 through November 8, 2010. The complaint seeks treble damages and costs, including attorney's fees. The defendants' motions to dismiss the complaint were denied by the court in April 2011. We believe the allegations are without merit and will defend this lawsuit vigorously. However, at this stage of the litigation, we are unable to predict the ultimate outcome or estimate a range of reasonably possible losses.
We are a defendant in a number of other lawsuits and claims arising out of the conduct of our business. While the ultimate results of such suits or other proceedings against us cannot be predicted with certainty, management believes the resolution of these other matters will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
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Item 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II: FINANCIAL INFORMATION
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Item 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Common Stock
Our Common Stock trades on the New York Stock Exchange under the symbol RKT. As of October 31, 2014, there were approximately 2,580 shareholders of record of our Common Stock. The number of shareholders of record includes one single shareholder, Cede & Co., for all of the shares held by our shareholders in individual brokerage accounts maintained at banks, brokers and institutions.
On August 27, 2014, we effected a two-for-one stock split of our Common Stock in the form of a 100% stock dividend to shareholders of record as of August 12, 2014. All share and per share information has been retroactively adjusted to reflect the stock split and we recorded the incremental par value of the newly issued shares with the offset to additional paid in capital.
Price Range of Common Stock and Dividends
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| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2014 | | Fiscal 2013 |
| Market Price | | | | Market Price | | |
| High | | Low | | Dividend | | High | | Low | | Dividend |
First Quarter | $ | 55.10 |
| | $ | 46.06 |
| | $ | 0.175 |
| | $ | 38.09 |
| | $ | 30.63 |
| | $ | 0.225 |
|
Second Quarter | $ | 58.20 |
| | $ | 47.52 |
| | $ | 0.175 |
| | $ | 46.47 |
| | $ | 35.32 |
| | $ | — |
|
Third Quarter | $ | 54.27 |
| | $ | 47.04 |
| | $ | 0.175 |
| | $ | 54.00 |
| | $ | 41.70 |
| | $ | 0.150 |
|
Fourth Quarter | $ | 53.49 |
| | $ | 46.70 |
| | $ | 0.175 |
| | $ | 63.03 |
| | $ | 48.91 |
| | $ | 0.150 |
|
In October 2014, our board of directors approved our November 2014 quarterly dividend of $0.1875 per share, indicating a current annualized dividend of $0.75 per share and a 7% increase over the $0.175 per share quarterly dividend paid in each quarter of fiscal 2014. In October 2013, our board of directors approved our November 2013 quarterly dividend of $0.175 per share, indicating a current annualized dividend of $0.70 per share and a 17% increase over the $0.15 per share quarterly dividend paid in May 2013 and August 2013. The $0.15 per share we paid in May 2013 and August 2013 was a 33% increase over the $0.1125 per share accelerated February 2013 quarterly dividend paid in December 2012 and the $0.1125 per share quarterly dividend paid in November 2012. During fiscal 2014, we paid aggregate dividends on our Common Stock of $0.70 per share and during fiscal 2013 we paid aggregate dividends of $0.525 per share. 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 Tables” entitled “Equity Compensation Plan Information” in the Proxy Statement for the Annual Meeting of Shareholders to be held on January 30, 2015, which will be filed with the SEC on or before December 31, 2014, is incorporated herein by reference. For additional information concerning our capitalization, see “Note 13. Shareholders’ Equity” of the Notes to Consolidated Financial Statements included herein.
Stock Repurchase Plan
Our board of directors has approved a stock repurchase plan that allows for the repurchase of shares of Common Stock over an indefinite period of time at the discretion of our management. Our stock repurchase plan does not allow for the shares available for repurchase to be split adjusted. Our stock repurchase plan, as amended in November 2013 and September 2014 following our stock split, allows for the repurchase of a total of 16.9 million shares of Common Stock, an increase from the 6.0 million previously authorized at September 30, 2013. In fiscal 2014, we repurchased approximately 4.0 million shares (or 4.7 million shares split adjusted) for an aggregate cost of $236.3 million. In fiscal 2013 and 2012, we did not repurchase any shares of Common Stock. As of September 30, 2014, we had remaining authorization to purchase approximately 8.7 million shares of Common Stock.
Pursuant to our repurchase plan, in the three months ended September 30, 2014, we repurchased 3,215,121 shares for an aggregate cost of $162.5 million. The following table presents information with respect to purchases of our Common Stock that we made during the three months ended September 30, 2014:
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| | | | | | | | | | | | | |
| | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
July 1, 2014 through July 31, 2014 | | — |
| | $ | — |
| | — |
| | 4,233,724 |
|
August 1, 2014 through August 31, 2014 | | — |
| | — |
| | — |
| | 4,233,724 |
|
September 1, 2014 through September 30, 2014 (1) | | 3,215,121 |
| | 50.54 |
| | 3,215,121 |
| | 8,702,951 |
|
Total | | 3,215,121 |
| | | | 3,215,121 |
| | |
| |
(1) | The increase in the maximum number of shares that may yet be purchased under the plans or programs includes the additional authorization of approximately 7.7 million shares on September 15, 2014. |
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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. “Management’s 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, 2014, 2013 and 2012, and the consolidated balance sheet data as of September 30, 2014 and 2013 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, 2011 and 2010, and the consolidated balance sheet data as of September 30, 2012, 2011 and 2010, from audited Consolidated Financial Statements not included in this report. The table that follows is consistent with those presentations with the exception of diluted earnings per share attributable to Rock-Tenn Company shareholders, diluted weighted average shares outstanding, dividends per common share and book value per common share that have been adjusted retroactively due to our August 2014 two-for-one stock split.
On May 27, 2011, we completed the Smurfit-Stone Acquisition. The Smurfit-Stone Acquisition was the primary reason for the changes in the selected financial data in fiscal 2012 and fiscal 2011 as compared to prior years due to the size and timing of the acquisition. Our results of operations shown below may not be indicative of future results.
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
| (In millions, except per share amounts) |
Net sales | $ | 9,895.1 |
| | $ | 9,545.4 |
| | $ | 9,207.6 |
| | $ | 5,399.6 |
| | $ | 3,001.4 |
|
Alternative fuel mixture credit, net of expenses (a) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 28.8 |
|
Pension lump sum settlement expense (b) | $ | 47.9 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Restructuring and other costs, net | $ | 55.6 |
| | $ | 78.0 |
| | $ | 75.2 |
| | $ | 93.3 |
| | $ | 7.4 |
|
Cellulosic biofuel producer credit, net (c) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 27.6 |
|
Net income attributable to Rock-Tenn Company shareholders (d) | $ | 479.7 |
| | $ | 727.3 |
| | $ | 249.1 |
| | $ | 141.1 |
| | $ | 225.6 |
|
Diluted earnings per share attributable to Rock-Tenn Company shareholders | $ | 3.29 |
| | $ | 4.98 |
| | $ | 1.72 |
| | $ | 1.38 |
| | $ | 2.85 |
|
Diluted weighted average shares outstanding | 146.0 |
| | 146.1 |
| | 144.1 |
| | 100.9 |
| | 78.2 |
|
Dividends paid per common share | $ | 0.70 |
| | $ | 0.525 |
| | $ | 0.40 |
| | $ | 0.40 |
| | $ | 0.30 |
|
Book value per common share | $ | 30.76 |
| | $ | 29.94 |
| | $ | 24.02 |
| | $ | 23.92 |
| | $ | 13.00 |
|
Total assets | $ | 11,039.7 |
| | $ | 10,733.4 |
| | $ | 10,687.1 |
| | $ | 10,566.0 |
| | $ | 2,914.9 |
|
Current portion of debt | $ | 132.6 |
| | $ | 2.9 |
| | $ | 261.3 |
| | $ | 143.3 |
| | $ | 231.6 |
|
Long-term debt due after one year | $ | 2,852.1 |
| | $ | 2,841.9 |
| | $ | 3,151.2 |
| | $ | 3,302.5 |
| | $ | 897.3 |
|
Total debt | $ | 2,984.7 |
| | $ | 2,844.8 |
| | $ | 3,412.5 |
| | $ | 3,445.8 |
| | $ | 1,128.9 |
|
Total Rock-Tenn Company shareholders’ equity | $ | 4,306.8 |
| | $ | 4,312.3 |
| | $ | 3,405.7 |
| | $ | 3,371.6 |
| | $ | 1,011.3 |
|
Net cash provided by operating activities | $ | 1,151.8 |
| | $ | 1,032.5 |
| | $ | 656.7 |
| | $ | 461.7 |
| | $ | 377.3 |
|
Capital expenditures | $ | 534.2 |
| | $ | 440.4 |
| | $ | 452.4 |
| | $ | 199.4 |
| | $ | 106.2 |
|
Cash paid for purchase of businesses, net of cash acquired | $ | 474.4 |
| | $ | 6.3 |
| | $ | 125.6 |
| | $ | 1,300.1 |
| | $ | 23.9 |
|
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(a) | The AFMC, net of expenses represents a reduction of cost of goods sold in our Consumer Packaging segment equal to $0.50 per gallon of alternative fuel used at our Demopolis, AL bleached paperboard mill from October 1, 2009 through the December 31, 2009 expiration of the tax credit. The credit is not taxable for federal income tax purposes. |
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(b) | In fiscal 2014, we completed the first phase of our previously announced lump sum pension settlement to certain eligible former employees and recorded a pre-tax charge of $47.9 million. For additional information see “Note 12. Retirement Plans” of the Notes to Consolidated Financial Statements included herein. |
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(c) | The CBPC is a $1.01 per gallon taxable credit which results in an after-tax credit value of approximately $0.62 per gallon. In accordance with the applicable IRS instructions for claiming the CBPC and returning the AFMC in this circumstance, we amended our 2009 federal income tax return to claim the CBPC credit rather than the AFMC. The cumulative impact of the CBPC election, net of the AFMC, was an increased after-tax benefit of $27.6 million, which was recorded as a reduction of income tax expense in the fourth quarter of fiscal 2010 and accounted for as a cumulative catch-up of a transaction directly with the government in its capacity as a taxing authority. |
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(d) | Net income attributable to Rock-Tenn Company shareholders in fiscal 2014 and fiscal 2013 was increased by a reduction of cost of goods sold of $32.3 million and $12.2 million pre-tax, respectively, for the recording of additional value of spare parts at our containerboard mills acquired in the Smurfit-Stone Acquisition. For additional information see “Note 4. Inventories” of the Notes to Consolidated Financial Statements included herein. Net income attributable to Rock-Tenn Company shareholders in fiscal 2013 was increased by the reversal of $254.1 million of tax reserves related to AFMC acquired in the Smurfit-Stone Acquisition that were partially offset by a resulting increase in a state tax valuation allowance of $1.2 million. Net income attributable to Rock-Tenn Company shareholders in fiscal 2012 was reduced by $25.9 million pre-tax for a loss on extinguishment of debt and fiscal 2011 was reduced by $59.4 million pre-tax for acquisition inventory step-up expense and $39.5 million pre-tax for a loss on extinguishment of debt. See Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations (Consolidated) — Loss on Extinguishment of Debt.” |
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Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
We are one of North America's leading providers of packaging solutions and manufacturers of containerboard and paperboard. We operate locations in the U.S., Canada, Mexico, Chile, Argentina and Puerto Rico. Our objective is to be the most respected company in our business by: a) providing superior paperboard, packaging and marketing solutions for consumer products companies at very low costs, b) investing for competitive advantage, c) maximizing the efficiency of our manufacturing processes by optimizing economies of scale, d) systematically improving processes and reducing costs throughout the Company, and e) seeking acquisitions that can dramatically improve our business. To achieve this objective: we focus on making our network of mills and converting plants cost-competitive; we invest to further optimize the combined system and to make continuous improvements using Six Sigma and Lean Manufacturing methods to further optimize our manufacturing and administrative processes; we have an integrated packaging solution that offers displays, folding cartons and corrugated boxes with the objective to be the clear partner and unrivaled provider of winning solutions for our customers; we are committed to exceeding our customers' expectations every time; and we are committed to create long-term shareholder value.
In fiscal 2014 we delivered record net sales and another year of solid operating results as measured by Adjusted Earnings Per Diluted Share (as hereinafter defined) and cash provided by operating activities despite significant inflationary headwinds. Net sales of $9,895.1 million in fiscal 2014 increased $349.7 million, or 3.7% over fiscal 2013. Segment income increased $50.5 million or 5.1% over fiscal 2013 to $1,039.4 million as strong sales pricing and mix, productivity improvements, income related to recording an additional value of spare parts and the impact of acquisitions more than offset inflationary headwinds and the impact of severe weather in the second quarter of fiscal 2014. Segment income was increased by $32.3 million and $12.2 million due to reductions to cost of goods sold recorded in fiscal 2014 and fiscal 2013, respectively, for immaterial corrections of errors to record spare parts identified that were not previously recorded in inventory in the containerboard mills acquired in the Smurfit-Stone Acquisition since we were beyond the measurement period. We estimate the impact of severe weather in the second quarter of fiscal 2014, as compared to our expectations going into the second quarter, to be approximately $44 million pre-tax. We have been quick to analyze and respond to changes in our customer demand and continue to identify projects to continuously improve our operational capabilities. We implemented our balanced capital allocation approach by investing $534.2 million in capital expenditures and $474.4 million in acquisitions while returning $337.4 million to our shareholders in dividends and share repurchases. We believe our strong balance sheet and cash flow provide us the flexibility to continue to invest to sustain and improve our operating performance.
During fiscal 2014 we completed three acquisitions. We acquired the Tacoma Mill in our Corrugated Packaging segment and completed two Merchandising Display segment acquisitions (AGI In-Store and NPG). We believe the Tacoma Mill, located in Tacoma, WA, is a strategic fit and the mill has improved our ability to satisfy West Coast customers and generate operating efficiencies across our containerboard system. The two display acquisitions have allowed us to more than double our permanent display business and we believe it supports our strategy to provide a more holistic portfolio of innovative in-store marketing solutions. These acquisitions contributed to our achieving record sales in fiscal 2014 including record sales in both our Corrugated Packaging and Merchandising Displays segments.
Net income in fiscal 2014 was $479.7 million compared to $727.3 million in fiscal 2013 and earnings per diluted share were $3.29 in fiscal 2014 compared to $4.98 in fiscal 2013. Net income in fiscal 2013 included a $252.9 million net tax benefit or $1.73 per diluted share for the reversal of tax reserves related to AFMC acquired in the Smurfit-Stone Acquisition. Adjusted Net Income and Adjusted Earnings Per Diluted Share (each as hereinafter defined) in fiscal 2014 were $549.2 million and $3.76, respectively, compared to $533.7 million and $3.65 in fiscal 2013. In fiscal 2014, Cash Generated for Net Debt (Increase) Repayment, Dividends, Acquisitions/Investments, Stock Repurchases, Pension Lump Sum Settlement Expense and Pension in Excess of Expense (as hereinafter defined) was $891.0 million, a 9.2% increase over the $815.6 million in fiscal 2013. See our reconciliations of the non-GAAP measures adjusted net income, adjusted earnings per diluted share and Cash Generated for Net Debt (Increase) Repayment, Dividends, Acquisitions/Investments, Stock Repurchases, Pension Lump Sum Settlement Expense and Pension in Excess of Expense below in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Measures” below.
Results of Operations (Consolidated)
The following table summarizes our consolidated results for the three years ended September 30, 2014 and is followed by a discussion of the adjustments to reconcile diluted earnings per share attributable to Rock-Tenn Company shareholders to Adjusted Earnings Per Diluted Share.
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2014 | | 2013 | | 2012 |
| (In millions, except per share data) |
Net sales | $ | 9,895.1 |
| | $ | 9,545.4 |
| | $ | 9,207.6 |
|
Cost of goods sold | 7,961.5 |
| | 7,698.9 |
| | 7,674.9 |
|
Gross profit | 1,933.6 |
| | 1,846.5 |
| | 1,532.7 |
|
Selling, general and administrative expenses | 975.7 |
| | 954.3 |
| | 927.5 |
|
Pension lump sum settlement expense | 47.9 |
| | — |
| | — |
|
Restructuring and other costs, net | 55.6 |
| | 78.0 |
| | 75.2 |
|
Operating profit | 854.4 |
| | 814.2 |
| | 530.0 |
|
Interest expense | (95.3 | ) | | (106.9 | ) | | (119.7 | ) |
Loss on extinguishment of debt | — |
| | (0.3 | ) | | (25.9 | ) |
Interest income and other income (expense), net | 2.4 |
| | (0.9 | ) | | 1.3 |
|
Equity in income of unconsolidated entities | 8.8 |
| | 4.6 |
| | 3.4 |
|
Income before income taxes | 770.3 |
| | 710.7 |
| | 389.1 |
|
Income tax (expense) benefit | (286.5 | ) | | 21.8 |
| | (136.9 | ) |
Consolidated net income | 483.8 |
| | 732.5 |
| | 252.2 |
|
Less: Net income attributable to noncontrolling interests | (4.1 | ) | | (5.2 | ) | | (3.1 | ) |
Net income attributable to Rock-Tenn Company shareholders | $ | 479.7 |
| | $ | 727.3 |
| | $ | 249.1 |
|
Set forth below is a reconciliation of Adjusted Earnings Per Diluted Share to the most directly comparable GAAP measure, Earnings per diluted share (in dollars per share), for the periods indicated:
|
| | | | | | | | | | | |
| Years Ended September 30, |
| 2014 | | 2013 | | 2012 |
| | | | | |
Earnings per diluted share | $ | 3.29 |
| | $ | 4.98 |
| | $ | 1.72 |
|
Alternative fuel mixture tax credit tax reserve adjustment | — |
| | (1.73 | ) | | — |
|
Restructuring and other costs and operating losses and transition costs due to plant closures | 0.26 |
| | 0.40 |
| | 0.40 |
|
Pension lump sum settlement expense | 0.20 |
| | — |
| | — |
|
Acquisition inventory step-up | 0.01 |
| | — |
| | — |
|
Loss on extinguishment of debt | — |
| | — |
| | 0.12 |
|
Adjusted Earnings Per Diluted Share | $ | 3.76 |
| | $ | 3.65 |
| | $ | 2.24 |
|
In fiscal 2014, our restructuring and other costs and operating losses and transition costs due to plant closures were $0.26 per diluted share and consisted primarily of $29.0 million of pre-tax facility closure and related operating losses and transition costs primarily related to consolidating corrugated container plants and recycled collection facilities and $30.5 million of pre-tax integration and acquisition costs. In fiscal 2014, we completed the first phase of our previously announced lump sum pension settlement to certain eligible former employees and recorded a pre-tax charge of $47.9 million or $0.20 per diluted share after-tax. Additionally, the period included $3.2 million pre-tax or $0.01 per diluted share of inventory step-up expense related to inventory acquired in the Tacoma Mill, AGI In-Store and NPG acquisitions.
In fiscal 2013, we recorded a tax benefit of $1.73 per diluted share for the reversal of $254.1 million of tax reserves related to AFMC acquired in the Smurfit-Stone Acquisition that were partially offset by a resulting increase in a state tax valuation allowance of $1.2 million. The deferred tax benefit was recorded in the second quarter of fiscal 2013 as the IRS completed its examination of Smurfit-Stone’s 2009 tax return. Our restructuring and other costs and operating losses and transition costs due to plant closures in fiscal 2013 were $0.40 per diluted share and consisted primarily of $69.4 million of pre-tax facility closure and related operating losses and transition costs primarily related to consolidating corrugated container plants and $20.3 million of pre-tax acquisition and integration costs.
In fiscal 2012, restructuring and other costs and operating losses and transition costs due to plant closures, net of related noncontrolling interest aggregated to $0.40 per diluted share and consisted primarily of $52.7 million of pre-tax facility closure and related operating losses and transition costs primarily related to the Matane, Quebec mill, a Hodge, LA paper machine closure as well as the closure of corrugated container plants and recycled fiber collection facilities acquired in the Smurfit-Stone Acquisition, net of gains on the sale of a few previously closed facilities, and $34.4 million of pre-tax integration and acquisition costs that primarily consisted of professional services, employee and other costs. We recognized pre-tax losses on extinguishment of debt in fiscal 2012 of $25.9 million or $0.12 per diluted share, primarily in connection with the redemption of our 9.25% senior notes due March 2016 at a redemption price equal to 104.625% of par and to expense related unamortized deferred financing and discount costs, and to expense certain unamortized deferred financing costs related to the extension and amendment of our Credit Facility and the issuance of senior notes.
For additional information regarding our restructuring and other costs see “Note 6. Restructuring and Other Costs, Net” of the Notes to Consolidated Financial Statements included herein.
Net Sales (Unaffiliated Customers)
Net sales for fiscal 2014 were $9,895.1 million compared to $9,545.4 million in fiscal 2013 primarily as a result of increased selling prices, acquisitions and higher volumes in the Consumer Packaging and Merchandising Displays segments which were partially offset by lower volumes in the Recycling and Corrugated Packaging segments, excluding the Tacoma Mill acquisition.
Net sales for fiscal 2013 were $9,545.4 million compared to $9,207.6 million in fiscal 2012 primarily as a result of higher containerboard and corrugated boxes and sheet selling prices, and generally higher volumes across our business that were partially offset by generally lower prices in our Consumer Packaging and Recycling segments.
Cost of Goods Sold
Cost of goods sold increased to $7,961.5 million in fiscal 2014 compared to $7,698.9 million in fiscal 2013. Cost of goods sold as a percentage of net sales of 80.5% decreased modestly in fiscal 2014 compared to 80.7% in fiscal 2013 primarily due to the increase in net sales from higher selling prices, productivity improvements and spare parts income which was partially offset by higher commodity, energy, freight and other costs, including the impact of severe weather in the second quarter of fiscal 2014. On a volume adjusted basis, commodity costs increased $33.3 million, including aggregate fiber and board costs which increased $49.5 million that were partially offset by $20.4 million of lower chemical costs, aggregate freight, shipping and warehousing costs increased $57.6 million and energy costs increased $32.8 million. Depreciation and amortization expense increased $28.4 million, group insurance expense increased $18.1 million and amortization of major maintenance outage expense, primarily in our containerboard mills, increased $11.9 million, each as compared to the prior year. Fiscal 2014 included $5.0 million of income related to a partial insurance settlement of property damage claims associated with the fiscal 2012 turbine failure at our Demopolis, AL mill. Fiscal 2014 and fiscal 2013 included a reduction of cost of goods sold of $32.3 million and $12.2 million, respectively, related to the recording of additional value of spare parts at our containerboard mills acquired in the Smurfit-Stone Acquisition as discussed above. Fiscal 2013 also included $15.7 million of income related to a partial insurance settlement of property damage claims associated with the fiscal 2012 turbine failure at our Demopolis, AL mill; an $11.4 million benefit related to the restructuring and extension of a steam supply contract and income of $9.2 million for the early termination of an energy supply contract, net of boiler start-up costs.
Cost of goods sold increased to $7,698.9 million in fiscal 2013 compared to $7,674.9 million in fiscal 2012. Cost of goods sold as a percentage of net sales decreased to 80.7% in fiscal 2013 compared to 83.4% in fiscal 2012 primarily as a result of higher corrugated selling prices. Impacting fiscal 2013 cost of goods sold were: increased freight costs of $37.0 million, including the impact of higher volumes; a $33.9 million increase in the amortization of major maintenance outage expense primarily at our containerboard mills, increased chemical costs in our mills of $21.4 million; $19.1 million of increased depreciation and amortization expense due to capital investments, net of a $11.4 million reduction in amortization expense related to a restructuring and extension of a steam supply contract; $15.7 million of income related to a partial insurance settlement of property damage claims associated with the fiscal 2012 turbine failure at our Demopolis, AL mill; a reduction of cost of goods sold of $12.2 million related to recording an additional value of spare parts at our containerboard mills acquired in the Smurfit-Stone Acquisition; income of $9.2 million for the early termination of an energy supply contract, net of boiler start-up costs; and $7.0 million of increased maintenance expense.
We value the majority of our U.S. inventories at the lower of cost or market with cost determined on LIFO, which we believe generally results in a better matching of current costs and revenues than under FIFO. 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 2014 | | Fiscal 2013 | | Fiscal 2012 |
| LIFO | | FIFO | | LIFO | | FIFO | | LIFO | | FIFO |
| | | | | (In millions) | | | | |
Cost of goods sold | $ | 7,961.5 |
| | $ | 7,958.4 |
| | $ | 7,698.9 |
| | $ | 7,651.6 |
| | $ | 7,674.9 |
| | $ | 7,699.9 |
|
Net income attributable to Rock-Tenn Company shareholders | $ | 479.7 |
| | $ | 481.6 |
| | $ | 727.3 |
| | $ | 757.1 |
| | $ | 249.1 |
| | $ | 233.3 |
|
Net income attributable to Rock-Tenn Company shareholders in fiscal 2014 and 2013 is lower under the LIFO method because we experienced periods of rising costs, and net income attributable to Rock-Tenn Company shareholders in fiscal 2012 is higher under the LIFO method because we experienced a period of declining costs.
Selling, General and Administrative Expenses
SG&A expenses increased $21.4 million, including the partial year impact of acquisitions, to $975.7 million in fiscal 2014 compared to $954.3 million in fiscal 2013 and include $86.0 million and $85.1 million of intangible amortization in fiscal 2014 and fiscal 2013, respectively. SG&A as a percentage of sales decreased slightly to 9.9% in fiscal 2014 compared to 10.0% in fiscal 2013. The increase in fiscal 2014 SG&A was primarily due to a $10.1 million increase in consulting and professional services expense, an $8.9 million increase in commissions expense and a $3.8 million increase in depreciation and amortization which were partially offset by decreased compensation and benefit costs.
SG&A expenses increased $26.8 million to $954.3 million in fiscal 2013 compared to $927.5 million in fiscal 2012 and were relatively flat as a percentage of net sales as inflationary items were offset by the impact of higher corrugated selling prices on net sales. SG&A expenses include $85.1 million and $83.8 million of intangible amortization in fiscal 2013 and fiscal 2012, respectively. The SG&A increases were primarily due to increased compensation and benefit costs.
Pension Lump Sum Settlement Expense
During the fourth quarter of fiscal 2014, we completed the first phase of our previously announced lump sum pension settlement to certain eligible former employees and as a result recorded a pre-tax charge of $47.9 million. For additional information see “Note 12. Retirement Plans” of the Notes to Consolidated Financial Statements included herein. We expect to complete the second and final phase of the lump sum settlements in the first quarter of fiscal 2015 and incur an estimated $15.0 million to $25.0 million pre-tax charge subject to the percentage of former employees that accept the offer and other factors. For additional information see “Note 20. Subsequent Event” of the Notes to Consolidated Financial Statements included herein.
Restructuring and Other Costs, Net
We recorded aggregate pre-tax restructuring and other costs of $55.6 million, $78.0 million and $75.2 million for fiscal 2014, 2013 and 2012, respectively. The charges in fiscal 2014, 2013 and 2012 were primarily associated with the acquisition and integration of Smurfit-Stone as well as plant closure activities consisting primarily of locations acquired in the Smurfit-Stone Acquisition, net of gains on the sale of previously closed facilities. The expense recognized each year is not comparable since the timing and scope of the individual actions vary. We generally expect the integration of the closed facility’s assets and production with other facilities to enable the receiving facilities to better leverage their fixed costs while eliminating fixed costs from the closed facility. We discuss these charges in more detail in “Note 6. Restructuring and Other Costs, Net” of the Notes to Consolidated Financial Statements included herein. We have restructured portions of our operations from time to time and it is possible that we may engage in additional restructuring opportunities in the future.
Loss on Extinguishment of Debt
Loss on extinguishment of debt in fiscal 2013 was $0.3 million. Loss on extinguishment of debt in fiscal 2012 was $25.9 million which was primarily in connection with the redemption of our 9.25% senior notes due March 2016 at a redemption price equal to 104.625% of par and to expense related unamortized deferred financing and discount costs; and to expense certain unamortized deferred financing costs related to the extension and amendment of our Credit Facility and the issuance of senior notes.
Interest Expense
Interest expense for fiscal 2014 decreased to $95.3 million from $106.9 million in fiscal 2013 and included amortization of deferred financing costs of $10.3 million compared to $10.2 million in fiscal 2013. The decrease in our average outstanding borrowings decreased interest expense by approximately $9.6 million, lower average interest rates decreased interest expense by approximately $2.1 million and deferred financing costs increased $0.1 million.
Interest expense for fiscal 2013 decreased to $106.9 million from $119.7 million in fiscal 2012 and included amortization of deferred financing costs of $10.2 million compared to $10.8 million for the same period in the prior year. The decrease in our average outstanding borrowings decreased interest expense by approximately $7.2 million, lower average interest rates decreased interest expense by approximately $5.0 million and deferred financing costs decreased $0.6 million.
Provision for Income Taxes
We recorded income tax expense of $286.5 million, at an effective tax rate of 37.2% in fiscal 2014, as compared to an income tax benefit of $21.8 million, at an effective tax rate benefit of 3.1% in fiscal 2013 and compared to income tax expense of $136.9 million, at an effective tax rate of 35.2% in fiscal 2012.
The effective tax rate for fiscal 2014 was different than the statutory rate primarily due to the impact of state taxes, a tax rate differential with respect to foreign earnings, and a $9.6 million charge to income tax expense to reflect an increase in the valuation allowance related to the State of New York’s March 31, 2014 income tax law change which reduced the tax rate for qualified New York State manufacturers to zero percent effective for tax years beginning on or after January 1, 2014 and thereby rendered a previously recorded deferred tax asset, net of certain deferred tax liabilities, to no longer have any value.
The effective tax rate benefit for fiscal 2013 was different than the statutory rate primarily due to the reversal of $254.1 million of tax reserves related to AFMC acquired in the Smurfit-Stone Acquisition. The benefit to deferred tax expense was recorded in the second quarter of fiscal 2013 as the IRS completed its examination of Smurfit-Stone’s 2009 tax return. We expect our effective tax rate to be approximately 34% to 36% in fiscal 2015, excluding the impact of discrete items. For additional information on income taxes see “Note 11. Income Taxes” of the Notes to Consolidated Financial Statements included herein.
Acquisitions
On August 29, 2014, we acquired the stock of AGI In-Store, a manufacturer of permanent point-of-purchase displays and fixtures to the consumer products and retail industries that will go to market as RockTenn In-Store Solutions. The purchase price was $72.0 million, net of cash and an estimated working capital settlement. We expect to make an election under section 338(h)(10) of the Code that will increase our tax basis in the acquired assets for an as yet to be determined amount not to exceed $2.0 million. We acquired the AGI In-Store business as we believe it supports our strategy to provide a more holistic portfolio of innovative in-store marketing solutions, including “store-within-a-store” displays, and will enhance cross-selling opportunities and bolster our growing retail presence. We have included the results of AGI In-Store’s operations since the date of the acquisition in our consolidated financial statements in our Merchandising Displays segment.
On May 16, 2014, we acquired certain assets and liabilities of the Tacoma Mill. The purchase price was $340.6 million including an estimated working capital settlement. We believe the Tacoma Mill, located in Tacoma, WA, is a strategic fit and the mill has improved our ability to satisfy West Coast customers and generate operating efficiencies across our containerboard system. We have included the results of the Tacoma Mill since the date of the acquisition in our consolidated financial statements in our Corrugated Packaging segment.
On December 20, 2013, we acquired the stock of NPG, a specialty display company. The purchase price was $59.6 million, net of cash acquired of $1.7 million and a working capital settlement. We acquired the NPG business as we believe NPG provides a broad range of display products and services to many of the most recognized retailers and their innovative retail solutions and large-format printing capability expands our customer base and significantly improves our ability to provide retail insights, innovation and connectivity to all of our customers. We have included the results of NPG’s operations since the date of the acquisition in our consolidated financial statements in our Merchandising Displays segment.
On June 22, 2012, we acquired the assets of Mid South, a specialty corrugated packaging manufacturer with operations in Cullman, AL, and Olive Branch, MS. The purchase price was $32.1 million. We acquired the Mid South business as part of our announced strategy to seek acquisitions that increase our integration levels in the corrugated markets. We have included the results of Mid South's operations since the date of acquisition in our consolidated financial statements in our Corrugated Packaging segment.
On October 28, 2011, we acquired the stock of four entities doing business as GMI. We made joint elections under section 338(h)(10) of the Code, that increased our tax basis in the underlying assets acquired. The purchase price was $90.2 million, including the amount paid to the sellers related to the Code section 338(h)(10) elections. We acquired the GMI business to expand our presence in the corrugated markets. The acquisition also increased our vertical integration. We have included the results of GMI's operations since the date of acquisition in our consolidated financial statements in our Corrugated Packaging segment.
We discuss these acquisitions in more detail in “Note 5. Acquisitions” of the Notes to Consolidated Financial Statements included herein.
Results of Operations (Segment Data)
Corrugated Packaging Segment (Aggregate Before Intersegment Eliminations)
|
| | | | | | | | | | |
| Net Sales (Aggregate) | | Segment Income | | Return on Sales |
| (In millions, except percentages) |
Fiscal 2012 | | | | | |
First Quarter | $ | 1,522.2 |
| | $ | 109.3 |
| | 7.2 | % |
Second Quarter | 1,504.7 |
| | 68.6 |
| | 4.6 |
|
Third Quarter | 1,545.3 |
| | 73.3 |
| | 4.7 |
|
Fourth Quarter | 1,597.2 |
| | 112.5 |
| | 7.0 |
|
Total | $ | 6,169.4 |
| | $ | 363.7 |
| | 5.9 | % |
| | | | | |
Fiscal 2013 | | | | | |
First Quarter | $ | 1,589.8 |
| | $ | 137.6 |
| | 8.7 | % |
Second Quarter | 1,608.2 |
| | 107.6 |
| | 6.7 |
|
Third Quarter | 1,719.3 |
| | 196.1 |
| | 11.4 |
|
Fourth Quarter | 1,744.4 |
| | 237.5 |
| | 13.6 |
|
Total | $ | 6,661.7 |
| | $ | 678.8 |
| | 10.2 | % |
| | | | | |
Fiscal 2014 | | | | | |
First Quarter | $ | 1,651.9 |
| | $ | 157.7 |
| | 9.5 | % |
Second Quarter | 1,651.7 |
| | 133.1 |
| | 8.1 |
|
Third Quarter | 1,774.2 |
| | 179.8 |
| | 10.1 |
|
Fourth Quarter | 1,825.9 |
| | 248.4 |
| | 13.6 |
|
Total | $ | 6,903.7 |
| | $ | 719.0 |
| | 10.4 | % |
Corrugated Packaging Segment Shipments are expressed as a tons equivalent which includes external and intersegment tons shipped from our Corrugated mills plus Corrugated Container Shipments converted from BSF to tons. The following data excludes container shipments in Asia.
Corrugated Packaging Shipments
|
| | | | | | | | | | | | | | |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Fiscal Year |
Fiscal 2012 | | | | | | | | | |
Corrugated Packaging Segment Shipments - thousands of tons | 1,842.3 |
| | 1,826.5 |
| | 1,884.5 |
| | 1,964.1 |
| | 7,517.4 |
|
Corrugated Containers Shipments - BSF | 18.8 |
| | 18.9 |
| | 19.2 |
| | 19.5 |
| | 76.4 |
|
Corrugated Containers Per Shipping Day - MMSF | 312.8 |
| | 295.4 |
| | 305.5 |
| | 308.7 |
| | 305.5 |
|
| | | | | | | | | |
Fiscal 2013 | | | | | | | | | |
Corrugated Packaging Segment Shipments - thousands of tons | 1,869.6 |
| | 1,860.0 |
| | 1,922.2 |
| | 1,921.7 |
| | 7,573.5 |
|
Corrugated Containers Shipments - BSF | 19.0 |
| | 18.7 |
| | 19.5 |
| | 19.1 |
| | 76.3 |
|
Corrugated Containers Per Shipping Day - MMSF | 310.7 |
| | 302.5 |
| | 304.9 |
| | 302.4 |
| | 305.1 |
|
| | | | | | | | | |
Fiscal 2014 | | | | | | | | | |
Corrugated Packaging Segment Shipments - thousands of tons | 1,803.8 |
| | 1,809.5 |
| | 1,961.8 |
| | 2,074.6 |
| | 7,649.7 |
|
Corrugated Containers Shipments - BSF | 18.4 |
| | 18.2 |
| | 18.8 |
| | 18.8 |
| | 74.2 |
|
Corrugated Containers Per Shipping Day - MMSF | 301.5 |
| | 288.8 |
| | 298.2 |
| | 294.7 |
| | 295.8 |
|
Net Sales (Aggregate) — Corrugated Packaging Segment
Net sales before intersegment eliminations for the Corrugated Packaging segment increased $242.0 million in fiscal 2014 compared to fiscal 2013 primarily due to the Tacoma Mill acquisition and higher corrugated selling prices which were partially offset by lower corrugated volumes excluding the acquisition.
Net sales before intersegment eliminations for the Corrugated Packaging segment increased $492.3 million in fiscal 2013 compared to fiscal 2012 primarily due to higher corrugated selling prices and volumes.
Segment Income — Corrugated Packaging Segment
Segment income attributable to the Corrugated Packaging segment in fiscal 2014 increased $40.2 million to $719.0 million compared to segment income of $678.8 million in fiscal 2013. The increase in segment income was primarily a result of higher selling prices, increased productivity improvements and synergies, spare parts income and the Tacoma Mill acquisition which were partially offset by higher commodity, freight and other costs, including the impact of severe weather in the second quarter of fiscal 2014 and lower corrugated volumes excluding the acquisition. We estimate the impact of severe weather in the segment in the second quarter of fiscal 2014, as compared to our expectations going into the second quarter, to be approximately $35 million pre-tax. Segment income in fiscal 2014 included a reduction of cost of goods sold of $32.3 million related to the recording of additional value of spare parts at our containerboard mills acquired in the Smurfit-Stone Acquisition as discussed above. On a volume adjusted basis, commodity costs increased $10.0 million, including aggregate fiber and board costs which increased $24.9 million that were partially offset by $21.7 million of lower chemical costs, energy costs increased $26.8 million and aggregate freight, shipping and warehousing costs increased $46.0 million, each as compared to the prior year period. Amortization of major maintenance outage expense increased $14.3 million, group insurance expense increased $12.0 million, depreciation and amortization expense increased $27.2 million, commissions expense increased $6.2 million and pension costs decreased $6.1 million, each as compared to the prior year period. Segment income in fiscal 2014 was reduced by $2.5 million of pre-tax acquisition inventory step-up expense associated with the Tacoma Mill acquisition. Notable items impacting segment income in fiscal 2013 were: a $11.4 million reduction in amortization expense related to a restructuring and extension of a steam supply contract; income of $12.2 million related to recording of additional value of spare parts at our containerboard mills acquired in the Smurfit-Stone Acquisition; and income of $9.2 million for the early termination of an energy supply contract, net of boiler start-up costs.
Segment income attributable to the Corrugated Packaging segment in fiscal 2013 increased $315.1 million to $678.8 million compared to segment income of $363.7 million in fiscal 2012. The increase in segment income was primarily a result of higher selling prices, higher volumes and increased synergies. Other notable factors impacting segment income in fiscal 2013 were: a $33.0 million increase in amortization of major maintenance outage expense; a $16.2 million increase in depreciation and amortization expense due to capital investments, net of a $11.4 million reduction in amortization expense related to a restructuring and extension of a steam supply contract; a reduction of cost of goods sold of $12.2 million related to recording an additional value of spare parts at our containerboard mills acquired in the Smurfit-Stone Acquisition; income of $9.2 million for the early termination of an energy supply contract, net of boiler start-up costs; and $7.5 million of increased maintenance expense. Additionally, at our mills, chemical costs increased $21.7 million, energy costs decreased approximately $21.0 million, and aggregate fiber costs increased approximately $8.2 million, each on a volume adjusted basis. Freight expense in the segment increased $30.5 million, in part due to higher volumes. Segment income in fiscal 2012 was reduced by $6.7 million of pre-tax losses at our closed Matane, Quebec containerboard mill and $0.8 million of pre-tax acquisition inventory step-up expense.
Consumer Packaging Segment (Aggregate Before Intersegment Eliminations)
|
| | | | | | | | | | |
| Net Sales (Aggregate) | | Segment Income | | Return on Sales |
| (In millions, except percentages) |
Fiscal 2012 | | | | | |
First Quarter | $ | 464.9 |
| | $ | 62.0 |
| | 13.3 | % |
Second Quarter | 484.1 |
| | 64.5 |
| | 13.3 |
|
Third Quarter | 473.9 |
| | 69.7 |
| | 14.7 |
|
Fourth Quarter | 496.4 |
| | 81.0 |
| | 16.3 |
|
Total | $ | 1,919.3 |
| | $ | 277.2 |
| | 14.4 | % |
| | | | | |
Fiscal 2013 | | | | | |
First Quarter | $ | 452.8 |
| | $ | 54.9 |
| | 12.1 | % |
Second Quarter | 468.3 |
| | 50.5 |
| | 10.8 |
|
Third Quarter | 482.1 |
| | 59.1 |
| | 12.3 |
|
Fourth Quarter | 495.5 |
| | 66.8 |
| | 13.5 |
|
Total | $ | 1,898.7 |
| | $ | 231.3 |
| | 12.2 | % |
| | | | | |
Fiscal 2014 | | | | | |
First Quarter | $ | 472.1 |
| | $ | 57.6 |
| | 12.2 | % |
Second Quarter | 489.3 |
| | 49.3 |
| | 10.1 |
|
Third Quarter | 497.0 |
| | 59.6 |
| | 12.0 |
|
Fourth Quarter | 525.1 |
| | 72.3 |
| | 13.8 |
|
Total | $ | 1,983.5 |
| | $ | 238.8 |
| | 12.0 | % |
Consumer Packaging Segment Shipments are expressed as a tons equivalent which includes external and intersegment tons shipped from our Consumer mills plus Consumer Packaging Converting Shipments converted from BSF to tons. The shipment data excludes gypsum paperboard liner tons produced by Seven Hills since it is not consolidated.
Consumer Packaging Shipments - tons in thousands
|
| | | | | | | | | | | | | | |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Fiscal Year |
Fiscal 2012 | | | | | | | | | |
Consumer Packaging Segment Shipments - thousands of tons | 370.3 |
| | 377.6 |
| | 384.0 |
| | 382.2 |
| | 1,514.1 |
|
Consumer Packaging Converting Shipments - BSF | 5.0 |
| | 5.2 |
| | 5.1 |
| | 5.2 |
| | 20.5 |
|
Consumer Packaging Converting Per Shipping Day - MMSF | 83.5 |
| | 81.0 |
| | 80.6 |
| | 83.1 |
| | 82.0 |
|
| | | | | | | | | |
Fiscal 2013 | | | | | | | | | |
Consumer Packaging Segment Shipments - thousands of tons | 368.5 |
| | 380.1 |
| | 396.2 |
| | 403.0 |
| | 1,547.8 |
|
Consumer Packaging Converting Shipments - BSF | 4.9 |
| | 5.2 |
| | 5.3 |
| | 5.3 |
| | 20.7 |
|
Consumer Packaging Converting Per Shipping Day - MMSF | 81.0 |
| | 83.9 |
| | 82.3 |
| | 84.3 |
| | 82.9 |
|
| | | | | | | | | |
Fiscal 2014 | | | | | | | | | |
Consumer Packaging Segment Shipments - thousands of tons | 378.1 |
| | 386.0 |
| | 394.3 |
| | 408.7 |
| | 1,567.1 |
|
Consumer Packaging Converting Shipments - BSF | 5.0 |
| | 5.3 |
| | 5.2 |
| | 5.5 |
| | 21.0 |
|
Consumer Packaging Converting Per Shipping Day - MMSF | 82.0 |
| | 83.6 |
| | 83.3 |
| | 86.1 |
| | 83.8 |
|
Net Sales (Aggregate) — Consumer Packaging Segment
Net sales increased 4.5% for the Consumer Packaging segment in fiscal 2014 compared to fiscal 2013 which was primarily due to higher selling prices and volumes. Segment shipments increased 1.2% compared to the prior year.
Net sales decreased 1.1% for the Consumer Packaging segment in fiscal 2013 compared to fiscal 2012 primarily due to generally lower selling prices across the segment and decreased volumes due to the planned major maintenance outage at our Demopolis, AL bleached paperboard mill which was largely offset by increased recycled mill and converting volumes. Adjusted to remove the fiscal 2012 impact of the termination and settlement of a paperboard supply agreement noted below, sales would have been essentially flat. The annual maintenance outage at our Demopolis mill generally varies in size every other year. In fiscal 2013, Demopolis had a major outage while the fiscal 2012 outage was of a shorter duration. Segment shipments increased 2.2% compared to the prior year.
Segment Income — Consumer Packaging Segment
Segment income of the Consumer Packaging segment in fiscal 2014 increased $7.5 million, primarily due to higher selling prices and increased volume which were partially offset by higher commodity and other costs, including the impact of severe weather in the second quarter of fiscal 2014. We estimate the impact of severe weather in the second quarter of fiscal 2014 for the segment, as compared to our expectations going into the second quarter, to be approximately $8 million pre-tax. On a volume adjusted basis, commodity costs increased $27.2 million, including aggregate fiber and board costs which increased $25.2 million, energy costs increased $6.1 million and aggregate freight, shipping and warehousing costs increased $3.5 million, each as compared to the prior fiscal year. Group insurance expense increased $6.5 million and bad debt expense decreased $3.4 million, each as compared to the prior fiscal year. The change in segment income was also impacted by a decrease of $10.7 million in fiscal 2014, as compared to fiscal 2013, related to the partial settlement of property damage claims associated with the fiscal 2012 turbine failure at our Demopolis, AL mill and related business interruption costs.
Segment income of the Consumer Packaging segment in fiscal 2013 decreased $45.9 million, primarily due to generally lower selling prices, increased virgin fiber, energy and other commodity costs that were partially offset by lower recycled fiber costs. At our mills, virgin fiber costs increased $10.0 million, energy costs increased $9.6 million and recycled fiber costs decreased approximately $16.7 million compared to the prior year. The change in segment income was also impacted by $16.1 million received in connection with the termination and settlement of a paperboard supply agreement, net of legal fees in fiscal 2012 that
was partially offset by $13.8 million of increased income in fiscal 2013 as compared to fiscal 2012 related to the partial settlement of property damage claims associated with the fiscal 2012 turbine failure at our Demopolis, AL mill and related business interruption costs recorded in fiscal 2012.
Merchandising Displays Segment (Aggregate Before Intersegment Eliminations)
|
| | | | | | | | | | |
| Net Sales (Aggregate) | | Segment Income | | Return on Sales |
| (In millions, except percentages) |
Fiscal 2012 | | | | | |
First Quarter | $ | 159.1 |
| | $ | 18.3 |
| | 11.5 | % |
Second Quarter | 168.0 |
| | 20.0 |
| | 11.9 |
|
Third Quarter | 158.5 |
| | 14.1 |
| | 8.9 |
|
Fourth Quarter | 170.4 |
| | 17.9 |
| | 10.5 |
|
Total | $ | 656.0 |
| | $ | 70.3 |
| | 10.7 | % |
| | | | | |
Fiscal 2013 | | | | | |
First Quarter | $ | 161.9 |
| | $ | 11.8 |
| | 7.3 | % |
Second Quarter | 162.1 |
| | 12.7 |
| | 7.8 |
|
Third Quarter | 166.4 |
| | 17.2 |
| | 10.3 |
|
Fourth Quarter | 184.2 |
| | 22.7 |
| | 12.3 |
|
Total | $ | 674.6 |
| | $ | 64.4 |
| | 9.5 | % |
| | | | | |
Fiscal 2014 | | | | | |
First Quarter | $ | 184.6 |
| | $ | 19.3 |
| | 10.5 | % |
Second Quarter | 213.0 |
| | 17.0 |
| | 8.0 |
|
Third Quarter | 225.1 |
| | 21.4 |
| | 9.5 |
|
Fourth Quarter | 229.2 |
| | 14.9 |
| | 6.5 |
|
Total | $ | 851.9 |
| | $ | 72.6 |
| | 8.5 | % |
Net Sales (Aggregate) — Merchandising Displays Segment
Our Merchandising Displays segment net sales increased 26.3% in fiscal 2014 compared to fiscal 2013 primarily due to higher volumes driven by customer promotional activity and net sales from the NPG and AGI In-Store acquisitions. Approximately two-thirds of the increase in net sales was organic sales growth.
Our Merchandising Displays segment net sales increased $18.6 million in fiscal 2013 compared to fiscal 2012 primarily due to higher volumes.
Segment Income — Merchandising Displays Segment
Segment income attributable to the Merchandising Displays segment increased $8.2 million in fiscal 2014 compared to fiscal 2013 primarily due to higher volumes, including the NPG and AGI In-Store acquisitions, which were partially offset by higher commodity and other costs including higher costs associated with supporting and onboarding new business, increased commissions expense and increased aggregate freight, shipping and warehousing costs.
Segment income attributable to the Merchandising Displays segment decreased $5.9 million in fiscal 2013 compared to fiscal 2012 primarily due to higher containerboard prices used in promotional displays which were partially offset by the impact of higher volumes.
Recycling Segment (Aggregate Before Intersegment Eliminations)
|
| | | | | | | | | | |
| Net Sales (Aggregate) | | Segment Income | | Return on Sales |
| (In millions, except percentages) |
Fiscal 2012 | | | | | |
First Quarter | $ | 171.0 |
| | $ | 3.5 |
| | 2.0 | % |
Second Quarter | 172.3 |
| | 4.2 |
| | 2.4 |
|
Third Quarter | 170.0 |
| | 2.2 |
| | 1.3 |
|
Fourth Quarter | 137.2 |
| | (2.8 | ) | | (2.0 | ) |
Total | $ | 650.5 |
| | $ | 7.1 |
| | 1.1 | % |
| | | | | |
Fiscal 2013 | | | | | |
First Quarter | $ | 126.8 |
| | $ | 4.3 |
| | 3.4 | % |
Second Quarter | 130.7 |
| | 3.5 |
| | 2.7 |
|
Third Quarter | 123.6 |
| | 2.0 |
| | 1.6 |
|
Fourth Quarter | 113.0 |
| | 4.6 |
| | 4.1 |
|
Total | $ | 494.1 |
| | $ | 14.4 |
| | 2.9 | % |
| | | | | |
Fiscal 2014 | | | | | |
First Quarter | $ | 99.6 |
| | $ | 0.1 |
| | 0.1 | % |
Second Quarter | 90.1 |
| | 2.8 |
| | 3.1 |
|
Third Quarter | 85.4 |
| | 2.1 |
| | 2.5 |
|
Fourth Quarter | 88.1 |
| | 4.0 |
| | 4.5 |
|
Total | $ | 363.2 |
| | $ | 9.0 |
| | 2.5 | % |
Fiber Reclaimed and Brokered
|
| | | | | | | | | | | | | | |
(Shipments in thousands of tons) | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Fiscal Year |
Fiscal 2012 | 2,064.5 |
| | 1,996.9 |
| | 2,039.7 |
| | 1,982.8 |
| | 8,083.9 |
|
Fiscal 2013 | 1,945.0 |
| | 1,802.5 |
| | 1,819.2 |
| | 1,826.6 |
| | 7,393.3 |
|
Fiscal 2014 | 1,562.5 |
| | 1,564.0 |
| | 1,573.6 |
| | 1,609.0 |
| | 6,309.1 |
|
Net Sales (Aggregate) — Recycling Segment
Our Recycling segment net sales decreased $130.9 million in fiscal 2014 compared to fiscal 2013 primarily due to lower volumes and recovered fiber prices as a result of soft global markets for recovered fiber, including exports to China, and collection facility closures.
Our Recycling segment net sales decreased $156.4 million in fiscal 2013 compared to fiscal 2012 primarily due to lower selling prices and lower volumes due in part to the reduced number of operating facilities and our exiting from low margin business.
Segment Income — Recycling Segment
Segment income attributable to the Recycling segment decreased $5.4 million in fiscal 2014 compared to fiscal 2013 primarily due to lower volumes which were partially offset by cost structure improvements as we continue to right size our recycling business by optimizing the plant footprint and administrative functions.
Segment income attributable to the Recycling segment increased $7.3 million in fiscal 2013 compared to fiscal 2012 primarily due to operational execution and cost structure improvements, including facility closures.
Liquidity and Capital Resources
We fund our working capital requirements, capital expenditures, acquisitions, restructuring activities, dividends and stock repurchases from net cash provided by operating activities, borrowings under our credit facilities, proceeds from our A/R Sales Agreement, proceeds from the sale of property, plant and equipment removed from service and proceeds received in connection with the issuance of debt and equity securities. Our primary credit facilities are our Credit Facility and our Receivables Facility.
Cash and cash equivalents were $32.6 million at September 30, 2014 and $36.4 million at September 30, 2013. At September 30, 2014 total debt was $2,984.7 million, $132.6 million of which was current. At September 30, 2013, total debt was $2,844.8 million. The principal components of our debt consist of a revolving credit facility, a term loan facility, a receivables-backed financing facility and various senior notes. A portion of the debt classified as long-term may be paid down earlier than scheduled at our discretion without penalty. Aggregate liquidity under our Receivables Facility and Credit Facility exceeded $1.5 billion at September 30, 2014. Certain restrictive covenants govern our maximum availability under the Credit Facility and Receivables Facility. We test and report our compliance with these covenants as required and we are in compliance with all of our covenants at September 30, 2014.
Credit Facility
On September 27, 2012 we entered into the Credit Facility to amend and extend the then existing facility. The Credit Facility, which is unsecured, has an original maximum principal amount of approximately $2.7 billion before scheduled payments and includes a $1.475 billion, 5-year revolving credit facility and a $1.223 billion, 5-year term loan facility. The facility matures on September 27, 2017. In December 2012, we prepaid our term loan facility through December 2014 with borrowings under our Receivables Facility, our revolving credit facility and available cash. At September 30, 2014, we had $41.4 million of outstanding letters of credit not drawn upon. Available borrowings under the revolving credit portion of the Credit Facility exceeded $1.3 billion.
Receivables-Backed Financing Facility
On September 15, 2014, we amended our Receivables Facility and extended the maturity date from December 18, 2015 to October 24, 2017, and continued the size of the facility at $700.0 million. The amendment reduced the credit spread for the used portion of the facility from 0.75% to 0.70% and made minor amendments to the process of calculating the Borrowing Base (as defined in the Receivables Facility). Borrowing availability under this facility is based on the eligible underlying accounts receivable and certain covenants. The Receivables Facility includes certain restrictions on what constitutes eligible receivables under the facility and continues to allow for the exclusion of eligible receivables of specific obligors each calendar year subject to the following restrictions from the earlier August 30, 2013 amendment: (i) the aggregate of excluded receivables may not exceed 7.5% of eligible receivables under the Receivables Facility, and (ii) the excluded receivables of each obligor may not exceed 2.5% of the aggregate outstanding balance. At September 30, 2014, we had $460.0 million of our $647.7 million maximum available borrowings outstanding under the Receivables Facility. The carrying amount of accounts receivable collateralizing the maximum available borrowings at September 30, 2014 was approximately $846.0 million. We have continuing involvement with the underlying receivables as we provide credit and collections services pursuant to the securitization agreement.
Senior Notes
At September 30, 2014, we had the following face value unsecured senior notes outstanding: $350 million of 4.45% senior notes due March 2019, $350 million of 3.50% senior notes due March 2020, $400 million of 4.90% senior notes due March 2022 and $350 million of 4.00% senior notes due March 2023. On March 15, 2013, we repaid our 5.625% notes due March 2013 upon maturity utilizing cash flow from operations and borrowings under our Receivables Facility.
See “Note 8. Debt” of the Notes to Condensed Consolidated Financial Statements included herein for additional information on our outstanding debt.
Accounts Receivable Sales Agreement
During the first quarter of fiscal 2014, we entered into an agreement (the “A/R Sales Agreement”) to sell to a third party financial institution all of the short term receivables generated from certain customer trade accounts, on a revolving basis, until the agreement is terminated by either party. Transfers under this agreement meet the requirements to be accounted for as sales in accordance with the “Transfers and Servicing” guidance in ASC 860. Cash proceeds related to the sales are included in cash from operating activities in the consolidated statement of cash flows in the accounts receivable line item. The loss on sale is not material as it is currently less than 1% per annum of the receivables sold, and is included in interest income and other income (expense),
net. For additional information see “Note 9. Fair Value — Accounts Receivable Sales Agreement” of the Notes to Condensed Consolidated Financial Statements included herein.
Loss on Extinguishment of Debt
During fiscal 2013 and 2012 loss on extinguishment of debt was $0.3 million and $25.9 million, respectively, for the expenses recorded in connection with various financing transactions. For additional information regarding these transactions see Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations (Consolidated) — Loss on Extinguishment of Debt.”
Cash Flow Activity
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2014 | | 2013 | | 2012 |
| | | (In millions) | | |
Net cash provided by operating activities | $ | 1,151.8 |
| | $ | 1,032.5 |
| | $ | 656.7 |
|
Net cash used for investing activities | $ | (967.4 | ) | | $ | (403.6 | ) | | $ | (544.2 | ) |
Net cash used for by financing activities | $ | (188.1 | ) | | $ | (629.2 | ) | | $ | (118.6 | ) |
Net cash provided by operating activities during fiscal 2014 increased primarily due to proceeds from the net sale of $136.6 million of accounts receivables in connection with the A/R Sales Agreement, the impact of increased aggregate net income, deferred taxes and depreciation and amortization, which were partially offset by a greater use of working capital excluding the previously mentioned sale of accounts receivables in the current year period. Net cash provided by operating activities during fiscal 2013 increased primarily due to increased aggregate net income, deferred taxes and depreciation and amortization, and decreased pension funding requirements, partially offset by a greater use of working capital in fiscal 2013 as compared to fiscal 2012. Net cash provided by operating activities in fiscal 2013 and fiscal 2012 was net of $167.1 million and $305.4 million, respectively, of pension and other postretirement funding more than expense. Fiscal 2012 also included a $12.8 million benefit payment to a former Smurfit-Stone executive and an aggregate $15.9 million use of working capital.
Net cash used for investing activities in fiscal 2014 consisted primarily of $534.2 million of capital expenditures and $474.4 million for the Tacoma Mill, NPG and AGI In-Store acquisitions that were partially offset by proceeds from the sale of various assets, the return of capital from unconsolidated entities and insurance proceeds. Net cash used for investing activities in fiscal 2013 consisted primarily of $440.4 million of capital expenditures and $6.3 million for the purchase of a corrugated sheet plant that were partially offset by $26.8 million of proceeds from the sale of property, plant and equipment related primarily to previously closed facilities and $15.4 million of insurance proceeds for a partial settlement related to the fiscal 2012 turbine failure at our Demopolis, AL bleached paperboard mill. The proceeds have been used to replace the turbine with a newer model. Net cash used for investing activities in fiscal 2012 consisted primarily of $452.4 million of capital expenditures, $17.0 million for the purchase of a leased energy co-generation facility at one of our mills and $125.6 million of cash paid primarily for the GMI and Mid South acquisitions, which was partially offset by $40.5 million of proceeds from the sale of property, plant and equipment which primarily consisted of corrugated converting facilities we previously closed and $10.2 million of insurance proceeds from the aforementioned Demopolis, AL mill turbine.
In fiscal 2014, net cash used for financing activities consisted primarily of $236.3 million used for stock repurchases and $101.1 million of cash dividends paid to shareholders partially offset by the net additions to debt aggregating $150.4 million. Net cash used for financing activities in fiscal 2013 consisted primarily of the net repayment of debt aggregating $557.6 million and $75.3 million of cash dividends paid to shareholders. In fiscal 2012, net cash used for financing activities consisted primarily of the net repayment of debt aggregating $46.5 million, $56.5 million of cash dividends paid to shareholders and $30.2 million of debt issuance and extinguishment costs.
Our capital expenditures aggregated $534.2 million in fiscal 2014 compared to $440.4 million in fiscal 2013. The increase over fiscal 2013 levels included a new wood yard and chip delivery system at our Florence, SC containerboard mill and our initial investment on a project to build a new fluidized bed biomass boiler at our Demopolis, AL bleached paperboard mill that will replace two 1950s power boilers and address the Boiler MACT requirements at the mill. The project has been expanded to add a gas package boiler to provide steam and non-condensable gas incineration backup capability for the mill. The fluidized bed biomass boiler project is expected to start-up in fiscal 2016. In addition, fiscal 2014 capital expenditures included the cost of the final phase of the Hopewell, VA modernization project we completed in May 2014 which installed a shoe press, new paper machine drives and a dryer section. The project provides the opportunity to increase our linerboard capacity to approximately 527,000
tons per year, or produce the pre-outage amount of linerboard with reduced energy costs. We successfully met our project goals and our customers have provided feedback that sheet quality is excellent. We installed seven EVOL flexo folder gluers in fiscal 2014 and began investment on another ten EVOLs to be installed in fiscal 2015 as we continue to modernize our box plant system. The increased capital investment was also due to our initial Boiler MACT expenditures that will be part of our total multi-year estimated Boiler MACT capital investment of approximately $55 million at our containerboard mills.
We expect fiscal 2015 capital expenditures to be approximately $500 to $550 million. We believe we have significant opportunity to improve our performance via capital investment in our box plant system, the most prominent investments being in the converting equipment in our box plants including the modernization of our box plant system by installing a total of thirty EVOLs. We have also identified more opportunities in our mill system to improve the productivity and cost structure, including projects such as converting to a carbonate caustic pulping process at our Stevenson, AL containerboard mill which is expected to improve yield and reduce cost. We expect our annual capital investment to continue in a similar range for the next three years. Our capital expenditure estimates exclude approximately $34 million of accrued liabilities associated with a dispute with vendors related to a fiscal 2012 major capital investment at one of our containerboard mills, which would increase capital expenditures to the extent paid. It is possible that our capital expenditure assumptions may change, project completion dates may change, or we may decide to spend a different amount depending upon opportunities we identify or to comply with environmental regulation changes such as those promulgated by the EPA. Our Boiler MACT projections are subject to change due to items such as the finalization of ongoing engineering work, EPA determinations on Boiler MACT implementation issues and the outcomes of pending legal challenges to the rules. We were obligated to purchase approximately $109.7 million of fixed assets at September 30, 2014 for various capital projects.
At September 30, 2014, the U.S. federal, state and foreign net operating losses, CBPC, Alternative Minimum Tax credits and other U.S. federal and state tax credits available to us aggregated approximately $291 million in future potential reductions of U.S. federal, state and foreign cash taxes. We utilized nearly all of our U.S. federal net operating losses in fiscal 2014 and based on our current projections, we expect to utilize the remaining CBPC, Alternative Minimum Tax and other U.S. federal credits and foreign net operating losses primarily over the next two years. We expect to receive increased tax benefits from a greater domestic manufacturer’s deduction which has been limited in recent years by federal taxable income after the use of federal net operating losses. State net operating losses and credits will be used over a longer period of time. Therefore, we expect our cash tax payments to be materially less than our income tax expense in fiscal 2015, significantly lower in fiscal 2016 and similar in fiscal 2017. However, it is possible that our utilization of these net operating losses and credits may change due to changes in taxable income, tax laws or tax rates, capital expenditures or other factors.
During fiscal 2014 and fiscal 2013, we made contributions of $224.7 million and $188.9 million, respectively, to our pension and supplemental retirement plans. The underfunded status of our plans at September 30, 2014 was approximately $1.1 billion. We currently expect to contribute approximately $160 million to our qualified defined benefit plans in fiscal 2015. We have made contributions and expect to continue to make contributions in the coming years to our pension plans in order to ensure that our funding levels remain adequate in light of projected liabilities and to meet the requirements of the Pension Act and other regulations. Based on current assumptions, including future interest rates, we currently estimate that minimum pension contributions will be in the range of approximately $89 million to $161 million annually in fiscal 2016 through 2018 and approximately $62 million in fiscal 2019. We do not expect our offers to settle obligations of certain of our defined benefit pension plans through lump sum payments to certain eligible former employees who are not currently receiving a monthly benefit to require us to make additional pension plan contributions. See “Note 12. Retirement Plans” of the Notes to Condensed Consolidated Financial Statements included herein. Our estimates are based on current factors, such as discount rates and expected return on plan assets. Future contributions are subject to changes in our underfunded status based on factors such as investment performance, discount rates, return on plan assets, changes in mortality or other assumptions and changes in legislation. It is possible that our assumptions may change, actual market performance may vary or we may decide to contribute different amounts. There can be no assurance that such changes, including potential turmoil in financial and capital markets, will not be material to our results of operations, financial condition or cash flows.
In October 2014, our board of directors approved our November 2014 quarterly dividend of $0.1875 per share, indicating a current annualized dividend of $0.75 per share and a 7% increase over the $0.175 per share quarterly dividend paid in each quarter of fiscal 2014. In October 2013, our board of directors approved our November 2013 quarterly dividend of $0.175 per share, indicating a current annualized dividend of $0.70 per share and a 17% increase over the $0.15 per share quarterly dividend paid in May 2013 and August 2013. The $0.15 per share we paid in May 2013 and August 2013 was a 33% increase over the $0.1125 per share accelerated February 2013 quarterly dividend paid in December 2012 and the $0.1125 per share quarterly dividend paid in November 2012. During fiscal 2014, we paid aggregate dividends on our Common Stock of $0.70 per share and during fiscal 2013 we paid aggregate dividends of $0.525 per share.
Our board of directors has approved a stock repurchase plan that allows for the repurchase of shares of Common Stock over an indefinite period of time at the discretion of our management. Our stock repurchase plan does not allow for shares available for repurchase to be split adjusted. Our stock repurchase plan, as amended in November 2013 and September 2014 following our stock split, allows for the repurchase of a total of 16.9 million shares of Common Stock, an increase from the 6.0 million previously authorized at September 30, 2013. In fiscal 2014, we repurchased approximately 4.0 million shares (or approximately 4.7 million shares split adjusted) for an aggregate cost of $236.3 million. In fiscal 2013 and 2012, we did not repurchase any shares of Common Stock. As of September 30, 2014, we had approximately 8.7 million shares of Common Stock available for repurchase.
We anticipate that we will be able to fund our capital expenditures, interest payments, dividends and stock repurchases, pension payments, working capital needs, note repurchases, restructuring activities, repayments of current portion of long-term debt and other corporate actions for the foreseeable future from cash generated from operations, borrowings under our Credit Facility and Receivables Facility, proceeds from our A/R Sales Agreement, proceeds from the issuance of debt or equity securities or other additional long-term debt financing, including new or amended facilities. In addition, we continually review our capital structure and conditions in the private and public debt markets in order to optimize our mix of indebtedness. In connection therewith, we may seek to refinance existing indebtedness to extend maturities, reduce borrowing costs or otherwise improve the terms and composition of our indebtedness.
Contractual Obligations
We summarize our enforceable and legally binding contractual obligations at September 30, 2014, and the effect these obligations are expected to have on our liquidity and cash flow in future periods in the following table. Certain amounts in this table are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties and other factors including estimated minimum pension contributions and estimated benefit payments related to postretirement obligations, supplemental retirement plans and deferred compensation plans. 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 |
| Total | | Fiscal 2015 | | Fiscal 2016 and 2017 | | Fiscal 2018 and 2019 | | Thereafter |
| (In millions) |
Long-Term Debt, including current portion (a) | $ | 2,990.6 |
| | $ | 132.6 |
| | $ | 976.4 |
| | $ | 775.0 |
| | $ | 1,106.6 |
|
Operating lease obligations (b) | 248.2 |
| | 58.3 |
| | 84.5 |
| | 50.8 |
| | 54.6 |
|
Purchase obligations and other (c) (d) (e) | 1,552.7 |
| | 588.2 |
| | 395.2 |
| | 197.3 |
| | 372.0 |
|
Total | $ | 4,791.5 |
| | $ | 779.1 |
| | $ | 1,456.1 |
| | $ | 1,023.1 |
| | $ | 1,533.2 |
|
| |
(a) | The long-term debt line item above includes only principal payments owed on our note agreements, Receivables Facility, Credit Facility and other debt assuming that all of our long-term debt will be held to maturity unless it is reflected in the current portion of debt. Unamortized discounts of $5.9 million are excluded from the table to arrive at actual debt obligations. For information on the interest rates applicable to our various debt instruments, see “Note 8. Debt” of the Notes to Consolidated Financial Statements included herein. |
| |
(b) | For more information, see “Note 10. Leases” of the Notes to Consolidated Financial Statements included herein. |
| |
(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) | We have included in the table future estimated minimum pension contributions and estimated benefit payments related to postretirement obligations, supplemental retirement plans and deferred compensation plans. Our estimates are based on current factors, such as discount rates and expected return on plan assets. Future contributions are subject to changes in our underfunded status based on factors such as investment performance, discount rates, return on plan assets and changes in legislation. It is possible that our assumptions may change, actual market performance may vary or we may decide to contribute different amounts. |
| |
(e) | We have not included in the table above the following items: |
| |
• | Seven Hills commenced operations on March 29, 2001. Our partner has the option to require us to purchase its interest in Seven Hills, at a formula price, effective on the anniversary of the commencement date by providing us notice two years prior to any such anniversary. No notification has been received to date; therefore, the earliest date on which we could be required to purchase our partner's interest is March 29, 2017. We currently project this contingent obligation to purchase our partner's interest (based on the formula) to be approximately $8 million, which would result in a purchase price of approximately 47% of our partner's share of the net equity reflected on Seven Hills' September 30, 2014 balance sheet. |
| |
• | An item labeled “other long-term liabilities” reflected on our consolidated balance sheet because these other long-term liabilities do not have a definite pay-out scheme. |
| |
• | We have excluded from the line item “Purchase obligations and other” $36.5 million for certain provisions of ASC 740 “Income Taxes” associated with liabilities for uncertain tax positions due to the uncertainty as to the amount and timing of payment, if any. |
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, are subject to change based on our business decisions.
Expenditures for Environmental Compliance
For a discussion of our expenditures for environmental compliance, see Item 1. “Business — Governmental Regulation — Environmental Regulation.”
Off-Balance Sheet Arrangement
In connection with the Smurfit-Stone Acquisition we acquired an off-balance sheet arrangement for an interest in various installment notes that originated from Smurfit-Stone's sale of owned and leased timberland for cash and installment notes. Smurfit-Stone sold timberland in Florida, Georgia and Alabama in October 1999. The final purchase price, after adjustments, was $710 million. Smurfit-Stone received $225 million in cash, with the balance of $485 million in the form of installment notes. Smurfit-Stone entered into a program to monetize the installment notes receivable. The notes were sold without recourse to TNH, a wholly-owned non-consolidated variable interest entity under the provisions of ASC 860 “Transfers and Servicing”, for $430 million cash proceeds and a residual interest in the notes. The transaction was accounted for as a sale under ASC 860. The residual interest in the notes was repaid during fiscal 2014 and TNH was subsequently dissolved.
Non-GAAP Measures
We have included in the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above financial measures that were not prepared in accordance with GAAP. Any analysis of non-GAAP financial measures should be used only in conjunction with results presented in accordance with GAAP. Below, we define the non-GAAP financial measures, discuss the reasons that we believe this information is useful to management and may be useful to investors, and provide reconciliations of the non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP. These measures may differ from similarly captioned measures of other companies. The following non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such.
We have defined the non-GAAP financial measure “Net Debt” to include the aggregate debt obligations reflected in our consolidated balance sheet, less the hedge adjustments resulting from fair value interest rate derivatives or swaps, if any, and less the balance sheet line item Cash and cash equivalents. Our management uses Net Debt, along with other factors, to evaluate our financial condition. We believe that Net Debt is an appropriate supplemental measure of financial condition and may be useful to investors because it provides a more complete understanding of our financial condition before the impact of our decisions regarding the appropriate use of cash and liquid investments.
We have also defined the non-GAAP financial measure “Cash Generated for Net Debt (Increase) Repayment, Dividends, Acquisitions/Investments, Stock Repurchases, Pension Lump Sum Settlement Expense and Pension Funding in Excess of Expense” to be the sum of the non-GAAP measure Net Debt (Increase) Repayment, and the following GAAP cash flow statement and income statement line items: Cash dividends paid to shareholders, Cash paid for the purchase of business, net of cash acquired plus
Investment in unconsolidated entities, Purchases of common stock, Pension lump sum settlement expense and Pension and other postretirement funding more than expense. Our management uses Cash Generated for Net Debt (Increase) Repayment, Dividends, Acquisitions/Investments, Stock Repurchases, Pension Lump Sum Settlement Expense and Pension Funding in Excess of Expense, along with other factors, to evaluate our performance. Net Debt (Increase) Repayment is the difference between Net Debt at two points in time. We believe that this measure is an appropriate supplemental measure of financial performance and may be useful to investors because it provides a measure of cash generated for the benefit of shareholders.
We also use the non-GAAP financial measures “Adjusted Net Income” and “Adjusted Earnings Per Diluted Share”. Management believes these non-GAAP financial measures provide our board of directors, investors, potential investors, securities analysts and others with useful information to evaluate our performance because it excludes restructuring and other costs, net, and other specific items that management believes are not indicative of the ongoing operating results of the business. The Company and our board of directors use this information to evaluate our performance relative to other periods. We believe that the most directly comparable GAAP measures to Adjusted Net Income and Adjusted Earnings Per Diluted Share are Net income attributable to Rock-Tenn Company shareholders and Earnings per diluted share, respectively.
Reconciliations of Non-GAAP Financial Measures to the Most Directly Comparable GAAP Measures
Set forth below is a reconciliation of Net Debt to the most directly comparable GAAP measures, Current Portion of Debt and Long-Term Debt Due After One Year for various periods (in millions):
|
| | | | | | | | | | | |
| Sep 30,
2014 |
| | Sep 30,
2013 |
| | Sep 30,
2012 |
|
Current Portion of Debt | $ | 132.6 |
| | $ | 2.9 |
| | $ | 261.3 |
|
Long-Term Debt Due After One Year | 2,852.1 |
| | 2,841.9 |
| | 3,151.2 |
|
Total Debt | 2,984.7 |
| | 2,844.8 |
| | 3,412.5 |
|
Less: Hedge Adjustments Resulting From Fair Value Interest Rate Derivatives or Swaps | — |
| | — |
| | (0.1 | ) |
| 2,984.7 |
| | 2,844.8 |
| | 3,412.4 |
|
Less: Cash and Cash Equivalents | (32.6 | ) | | (36.4 | ) | | (37.2 | ) |
Net Debt | $ | 2,952.1 |
| | $ | 2,808.4 |
| | $ | 3,375.2 |
|
| | | | | |
Net Debt (Increase) Repayment | $ | (143.7 | ) | | $ | 566.8 |
| | |
Net Debt (Increase) Repayment in fiscal 2014 was impacted by the Tacoma Mill, NPG and AGI In-Store acquisitions as well as stock repurchases. See “Note 5. Acquisitions” of the Notes to Condensed Consolidated Financial Statements section included herein for additional information.
Set forth below is a calculation of Cash Generated for Net Debt (Increase) Repayment, Dividends, Acquisitions/Investments, Stock Repurchases, Pension Lump Sum Settlement Expense and Pension Funding in Excess of Expense for fiscal 2014 and 2013 using the various non-GAAP and GAAP measures referenced above (in millions):
|
| | | | | | | |
| September 30,
2014 |
| | September 30,
2013 |
|
Net debt (increase) repayment | $ | (143.7 | ) | | $ | 566.8 |
|
Cash dividends paid to shareholders | 101.1 |
| | 75.3 |
|
Cash paid for the purchase of businesses, net of cash acquired plus Investment in unconsolidated entity | 474.4 |
| | 6.4 |
|
Purchases of common stock | 236.3 |
| | — |
|
Pension lump sum settlement expense | 47.9 |
| | — |
|
Pension and postretirement funding more than expense | 175.0 |
| | 167.1 |
|
Cash Generated for Net Debt (Increase) Repayment, Dividends, Acquisition / Investments, Stock Repurchases, Pension Lump Sum Settlement Expense and Pension Funding in Excess of Expense | $ | 891.0 |
| | $ | 815.6 |
|
Set forth below is a reconciliation of Adjusted Net Income to Net income attributable to Rock-Tenn Company shareholders (in millions, net of tax):