 |
|
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Stock
Our Class A common stock trades on the New York Stock Exchange under the Symbol RKT. As of December 5, 2002, there were
approximately 454 Class A common shareholders of record.
Price Range of Common Stock
| |
|
Fiscal 2002 |
|
Fiscal 2001 |
|
|
|
|
|
| |
|
High |
|
Low |
|
High |
|
Low |
|
| First Quarter |
|
$14.92 |
|
$ 9.80 |
|
$10.38 |
|
$6.31 |
| Second Quarter |
|
$22.20 |
|
$14.75 |
|
$ 8.98 |
|
$ 7.13 |
| Third Quarter |
|
$23.81 |
|
$13.50 |
|
$13.10 |
|
$ 6.75 |
| Fourth Quarter |
|
$18.50 |
|
$11.75 |
|
$14.00 |
|
$ 8.70 |
Dividends
In October 2002, our board of directors approved a resolution to increase our quarterly dividend to $0.08
per share, or $0.32 per year, on our Class A common stock. We believe that this increase was warranted by the
reduction in our debt levels over the past two years and our lower level of expected capital expenditures in
relation to the cash flows that our business has been generating. For additional dividend information, please
see Item 6, "Selected Financial Data."
Securities Authorized for Issuance Under Equity Compensation Plans
The section under the heading "Executive Compensation" entitled "Equity Compensation Plan Information"
in the Proxy Statement for the Annual Meeting of Shareholders to be held on January 24, 2003 is
incorporated herein by reference.
For additional information concerning our capitalization, please see Note 3, "Shareholders' Equity" of
the Notes to Consolidated Financial Statements section of the Financial Statements included herein.
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 "Management's Discussion and Analysis of Financial Condition
and Results of Operations," which are included elsewhere in this report. The consolidated statement of
operations data for the years ended September 30, 2002, 2001 and 2000 and the consolidated balance sheet
data as of September 30, 2002 and 2001 are derived from the Consolidated Financial Statements included
elsewhere in this report. The consolidated statement of operations data for the years ended September 30,
1999 and 1998 and the consolidated balance sheet data as of September 30, 2000, 1999 and 1998 are derived
from audited Consolidated Financial Statements not included in this report.
|
Year Ended September 30, |
|
|
| |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
1998 |
|
|
|
|
|
|
| |
(In thousands, except per share amounts) |
| Net Sales |
$1,436,547 |
$1,441,632 |
$1,463,288 |
$1,313,371 |
$1,297,360 |
| Plant closing and other costs |
18,237 |
16,893 |
65,630 |
6,932 |
1,997 |
| Goodwill amortization(a) |
--- |
8,569 |
9,069 |
9,410 |
9,429 |
| Income (loss) before income taxes |
53,818 |
52,134 |
(4,346) |
70,253 |
74,613 |
Income (loss) before cumulative effect of a change in
accounting principle |
32,470 |
30,237 |
(15,916) |
39,698 |
42,020 |
| Net Income (loss) |
26,626 |
30,523 |
(15,916) |
39,698 |
42,020 |
|
|
Diluted earnings (loss) per common share before cumulative
effect of a change in accounting principle |
0.94 |
0.90 |
(0.46) |
1.13 |
1.20 |
| Diluted earnings (loss) per common share |
0.77 |
0.91 |
(0.46) |
1.13 |
1.20 |
| Dividends paid per common share |
0.30 |
0.30 |
0.30 |
0.30 |
0.30 |
| Book value per common share |
11.80 |
12.00 |
11.57 |
12.36 |
11.49 |
|
|
| Total assets |
1,173,733 |
1,164,413 |
1,158,963 |
1,161,470 |
1,111,481 |
| Debt excluding fair value of hedging instruments |
453,240 |
485,639 |
534,820 |
498,845 |
508,338 |
| Fair value of hedging instruments |
19,751 |
8,603 |
--- |
--- |
--- |
| Total debt |
472,991 |
494,242 |
534,820 |
498,845 |
508,338 |
| Shareholders' equity |
405,147 |
402,760 |
386,303 |
432,164 |
397,415 |
|
|
| Cash provided by operating activities |
117,558 |
146,027 |
102,444 |
112,416 |
125,688 |
| Capital expenditures |
77,640 |
72,561 |
94,640 |
92,333 |
81,666 |
| Cash paid for joint venture investment(b) |
1,720 |
9,627 |
7,133 |
--- |
--- |
| Cash paid for purchases of businesses |
25,351 |
--- |
--- |
--- |
--- |
|
|
Notes:
(a) Amount not deductible for income tax purposes was $6,189,000, $6,550,000, $6,900,000 and $6,928,000 in fiscal 2001, 2000,
1999 and 1998, respectively.
(b) Of the total cash paid for the joint venture investment, contributions for capital expenditures amounted to $383,000,
$7,667,000 and $7,133,000 during fiscal 2002, 2001 and 2000, respectively.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
Segment and Market Information
We report our results in three industry segments: (1) packaging products, (2) merchandising displays
and corrugated packaging, and (3) paperboard. No single external customer accounts for more than 10% of
our consolidated net sales. During fiscal 2002, the top ten customers represented approximately 28% of our
consolidated net sales.
The packaging products segment consists of facilities that produce folding cartons, interior packaging and
thermoformed plastic packaging. We compete with national, regional and local packaging suppliers operating
in North America. During fiscal 2002, we sold packaging products to approximately 2,900 customers and the
top ten customers accounted for approximately 32% of the external sales of the packaging products segment.
We sell packaging products to customers in a variety of industries including customers in the food and
beverage industries and to manufacturers of other non-durable goods.
The merchandising displays and corrugated packaging segment consists of facilities that produce
merchandising displays and flexographic and litho-laminated corrugated packaging. We compete with a
number of national, regional and local suppliers of those goods in this segment. During fiscal 2002, we sold
display products to approximately 350 customers and corrugated packaging products to approximately 800
customers. The top ten customers of the segment accounted for approximately 57% of external sales.
The paperboard segment consists of facilities that collect recovered paper and that manufacture 100%
recycled clay-coated and specialty paperboard, corrugating medium, and laminated paperboard products. In
our clay-coated and specialty paperboard divisions, we compete with integrated and non-integrated companies
operating in North America manufacturing various grades of paperboard as well as a limited amount of
paperboard imported by manufacturers outside of North America. In our laminated paperboard products
division, we compete with a small number of national, regional and local companies offering highly specialized
products. We also compete with foreign companies in the book cover market. Our recycled fiber division
competes with national, regional and local companies. During fiscal 2002, we sold recycled paperboard,
corrugating medium, laminated paperboard products and recovered paper to approximately 2,000 customers
and the top ten external customers of the segment represented approximately 49% of external sales. For the
fiscal year ended September 30, 2002, approximately 30% of our segment sales were made to internal
customers, predominantly in our packaging products segment. Our paperboard segment's sales volumes may
therefore be directly impacted by changes in demand for our packaging products.
All of our businesses are highly competitive. We regularly bid for sales opportunities to customers for new
business or for renewal of existing business. The loss of business or the award of new business from our larger
customers may have a significant impact on our results of operations.
Our ability to fully pass through fiber price increases can be limited based on competitive market
conditions for various products that we sell and by the actions of our competitors. In addition, most of our
paperboard and paperboard-based converted products are sold pursuant to term contracts that provide that
prices are either fixed for specified terms, or provide for price adjustments based on changes in specified
paperboard index prices. The effect of these contractual provisions generally is to either limit the amount or
delay our ability to recover announced price increases for paperboard.
In July 2002, Smurfit-Stone Container Corporation, a customer for whom we provided approximately
15,000 tons of paperboard annually for use in tube and core manufacturing, announced the sale of 17 of its
tube and core manufacturing facilities to Caraustar Industries, Inc. As a result, Caraustar Industries, Inc.
plans to increase its sales of paperboard to these newly acquired facilities. We believe we will be able to shift a
significant portion of the volume of paperboard sold to Smurfit-Stone Container Corporation to other tube and
core manufacturers and, therefore, do not expect a material impact on our operations.
Critical Accounting Policies
Our accompanying consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States, which require management to make estimates that affect
the amounts of revenues, expenses, assets and liabilities reported. The following are critical accounting matters
which are both very important to the portrayal of our financial condition and results and which require some of
management's most subjective and complex judgments. The accounting for these matters involves the making
of estimates based on current facts, circumstances and assumptions which, in management's judgment, could
change in a manner that would materially affect management's future estimates with respect to such matters
and, accordingly, could cause future reported financial condition and results to differ materially from financial
results reported based on management's current estimates.
Accounts Receivable. We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current credit worthiness, as determined by our review of their
current credit information. We continuously monitor collections from our customers and maintain a provision
for estimated credit losses based upon our customers' financial condition, our collection experience and any
other relevant customer specific credit information. While such credit losses have historically been within our
expectations and the provisions established, it is possible that our credit loss rates could be higher or lower in
the future.
Inventory. Inventories are carried at the lower of cost or market. Cost includes materials, labor and
overhead. Market, with respect to all inventories, is replacement cost or net realizable value. Management
frequently reviews inventory to determine the necessity of reserves for excess, obsolete or unsaleable inventory.
These reviews require management to assess customer and market demand. These estimates may prove to be
inaccurate, in which case we may have overstated or understated the reserve required for excess, obsolete or
unsaleable inventory.
Impairment of Long-Lived Assets and Goodwill. We periodically evaluate fixed assets and goodwill for
potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on
legal factors, market conditions and operational performance. Future events could cause us to conclude that
impairment indicators exist and that assets associated with a particular operation are impaired. Evaluating the
impairment also requires us to estimate future operating results and cash flows which also require judgment by
management. Any resulting impairment loss could have a material adverse impact on our financial condition
and results of operations.
Self-Insurance. We are self-insured for the majority of our group health insurance costs, subject to
specific retention levels. Consulting actuaries and administrators assist us in determining our liability for self-insured
claims. While we believe that our assumptions are appropriate, significant differences in our actual
experience or significant changes in our assumptions may materially affect our group health insurance costs.
Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements,
we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process
involves us estimating our actual current tax exposure together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These differences result in deferred tax
assets and liabilities, which are included within our consolidated balance sheet. While we believe that our
assumptions are appropriate, significant differences in our actual experience or significant changes in our
assumptions may materially affect our income tax exposure.
Pension and Other Post-retirement Benefits. The determination of our obligation and expense for
pension and other post-retirement benefits is dependent on our selection of certain assumptions used by
actuaries in calculating such amounts. Those assumptions are described in Note 8 to the consolidated financial
statements and include, among others, the discount rate, expected long-term rate of return on plan assets and
rates of increase in compensation levels. During fiscal 2002, the effect of a 0.25% point change in the discount
rate would have impacted income before income taxes by approximately $1.0 million. In accordance with
accounting principles generally accepted in the United States, actual results that differ from our assumptions
are accumulated and amortized over future periods and therefore, generally affect our recognized expense,
recorded obligation and funding requirements in future periods. While we believe that our assumptions are
appropriate, significant differences in our actual experience or significant changes in our assumptions may
materially affect our pension and other post-retirement benefit obligations and our future expense.
The following table shows certain operating data for our three industry segments. Certain of our income
and expenses are not allocated to our segments and are thus not reflected in the information used by
management to make operating decisions and assess performance. These items are reported as non-allocated
expenses. These include elimination of intersegment profit, plant closing and related expenses and certain
corporate expenses.
Results of Operations
We provide quarterly information in the following tables to assist in evaluating trends in our results of
operations. For additional discussion of quarterly information, see our quarterly reports on Form 10-Q filed
with the Securities and Exchange Commission.
Net Sales (Unaffiliated Customers)
Net sales for fiscal 2002 decreased 0.4% to $1,436.5 million from $1,441.6 million for fiscal 2001. Net
sales decreased as a result of weaker market conditions in our paperboard businesses and the impact of lower
paperboard prices on our paperboard and converting businesses. These results were partially offset by volume
increases in the merchandising display business.
Net sales for fiscal 2001 decreased 1.5% to $1,441.6 million from $1,463.3 million for fiscal 2000. Net
sales decreased as a result of decreased volumes in specialty paperboard and laminated paperboard products as
well as price decreases in recycled fiber. These price and volume declines were partially offset by price and
volume increases in displays and plastic packaging.
Net Sales (Aggregate) - Packaging Products Segment
| |
|
First Quarter |
|
Second Quarter |
|
Third Quarter |
|
Fourth Quarter |
|
Fiscal Year |
|
|
|
|
|
|
| |
(In millions) |
| 2000 |
$192.9 |
$195.1 |
$202.8 |
$206.6 |
$797.4 |
| 2001 |
195.6 |
206.9 |
198.6 |
205.0 |
806.1 |
| 2002 |
194.5 |
192.0 |
199.7 |
204.0 |
790.2 |
Net sales of the packaging products segment before intersegment eliminations for fiscal 2002 decreased
2.0% to $790.2 million from $806.1 million for fiscal 2001.
Net sales of the packaging products segment before intersegment eliminations for fiscal 2001 increased
1.1% to $806.1 million from $797.4 million for fiscal 2000.
Net Sales (Aggregate) by Division - Packaging Products Segment
| |
|
Folding Carton |
|
Interior Packaging |
|
Plastic Packaging |
|
|
|
|
| |
(In millions) |
| 2000 |
$597.4 |
$136.4 |
$63.6 |
| 2001 |
602.7 |
126.5 |
76.9 |
| 2002 |
598.5 |
124.2 |
67.5 |
The decrease in net sales of the packaging products segment before intersegment eliminations for fiscal
2002 as compared to fiscal 2001 was the result of lower volumes and selling prices in our plastic packaging and
interior packaging divisions offsetting the volume increases in our folding carton division. The decline in sales
prices reflected in part the pass through of lower costs for paperboard.
The increase in net sales of the packaging products segment before intersegment eliminations for fiscal
2001 as compared to fiscal 2000 was primarily the result of increased prices and volumes in our plastic
packaging business offset by lower volumes in our interior packaging business.
Net Sales (Aggregate) - Merchandising Displays and Corrugated Packaging Segment
| |
|
First Quarter |
|
Second Quarter |
|
Third Quarter |
|
Fourth Quarter |
|
Fiscal Year |
|
|
|
|
|
|
| |
(In millions) |
| 2000 |
$52.3 |
$59.2 |
$59.1 |
$68.2 |
$238.8 |
| 2001 |
57.8 |
65.8 |
65.8 |
74.0 |
263.4 |
| 2002 |
72.4 |
70.1 |
68.0 |
79.6 |
290.1 |
Net sales within this segment before intersegment eliminations for fiscal 2002 increased 10.1% to
$290.1 million from $263.4 million for fiscal 2001.
Net sales within this segment before intersegment eliminations for fiscal 2001 increased 10.3% to
$263.4 million from $238.8 million for fiscal 2000.
Net Sales (Aggregate) by Division - Merchandising Displays and Corrugated Packaging Segment
| |
|
Merchandising Displays |
|
Corrugated Packaging |
|
|
|
| |
(In millions) |
| 2000 |
$152.7 |
$86.1 |
| 2001 |
181.1 |
82.3 |
| 2002 |
218.6 |
71.5 |
The increase in net sales of the merchandising displays and corrugated packaging segment before
intersegment eliminations for fiscal 2002 as compared to fiscal 2001 was the result of higher volumes in our
merchandising display business, including the benefit of two major product launches on behalf of major
national consumer products companies as well as two acquisitions made during fiscal 2002. These results were
partially offset by lower volumes in our corrugated packaging business due to generally weaker market
conditions.
The increase in net sales of the merchandising displays and corrugated packaging segment before
intersegment eliminations for fiscal 2001 as compared to fiscal 2000 was the result of increased volumes and
increases in pricing of displays offset by lower volumes in our corrugated packaging business due to generally
weaker market conditions.
Net Sales (Aggregate) - Paperboard Segment
| |
|
First Quarter |
|
Second Quarter |
|
Third Quarter |
|
Fourth Quarter |
|
Fiscal Year |
|
|
|
|
|
|
| |
(In millions) |
| 2000 |
$144.3 |
$154.7 |
$148.9 |
$140.6 |
$588.5 |
| 2001 |
131.5 |
133.1 |
130.5 |
129.4 |
524.5 |
| 2002 |
125.1 |
123.7 |
129.1 |
138.3 |
516.2 |
Net sales of the paperboard segment before intersegment eliminations for fiscal 2002 decreased 1.6% to
$516.2 million from $524.5 million for fiscal 2001.
Net sales of the paperboard segment before intersegment eliminations for fiscal 2001 decreased 10.9% to
$524.5 million from $588.5 million for fiscal 2000.
Net Sales (Aggregate) by Division - Paperboard Segment
| |
|
Coated Paperboard |
|
Specialty Paperboard |
|
Recycled Fiber |
|
Laminated Paperboard Products |
|
|
|
|
|
| |
(In millions) |
| 2000 |
$304.0 |
$100.3 |
$48.4 |
$135.8 |
| 2001 |
295.4 |
83.2 |
33.0 |
112.9 |
| 2002 |
298.8 |
71.7 |
40.7 |
105.0 |
The decrease in net sales of the paperboard segment before intersegment eliminations for fiscal 2002 as
compared to fiscal 2001 was primarily due to a decrease in demand for our products by customers in the book
and ready to assemble furniture companies, which adversely affected the volumes of the laminated paperboard
products and specialty paperboard businesses. Reduced volumes at our interior packaging business over fiscal
2001 further contributed to the sales decline. These declines were partially offset by increased sales in our
recycled fiber business due to an increase in fiber prices during the last half of fiscal 2002.
The decrease in net sales of the paperboard segment before intersegment eliminations for fiscal 2001 as
compared to fiscal 2000 was the result of a significant decline in recycled fiber prices as well as volume
declines due to a general weakening in the book and ready to assemble furniture industries. Reduced volumes
at our interior packaging business over fiscal 2000 further contributed to the sales decline.
Cost of Goods Sold
Cost of goods sold for fiscal 2002 decreased 0.5% to $1,145.5 million from $1,151.2 million for fiscal 2001.
Cost of goods sold as a percentage of net sales remained relatively flat at 79.7% for fiscal 2002 and 79.9% for
fiscal 2001.
Cost of goods sold for fiscal 2001 decreased 2.6% to $1,151.2 million from $1,181.9 million for fiscal 2000.
Cost of goods sold as a percentage of net sales for fiscal 2001 decreased to 79.9% from 80.8% for fiscal 2000.
The decrease in cost of goods sold as a percentage of net sales resulted from lower average recovered paper
costs offset by higher energy expenses.
Substantially all of our U.S. inventories are valued at the lower of cost or market with cost determined on
the last-in, first-out, or "LIFO," inventory valuation method, which we believe generally results in a better
matching of current costs and revenues than under the first-in, first-out, or "FIFO," inventory valuation
method. In periods of increasing costs, the LIFO method generally results in higher cost of goods sold than
under the FIFO method. In periods of decreasing costs, the results are generally the opposite.
The following table illustrates the comparative effect of LIFO and FIFO accounting on our results of
operations. These supplemental FIFO earnings reflect the after-tax effect of eliminating the LIFO adjustment
each year.
| |
|
2002 |
|
2001 |
|
2000 |
|
|
|
|
|
|
|
| |
|
LIFO |
|
FIFO |
|
LIFO |
|
FIFO |
|
LIFO |
|
FIFO |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In millions) |
| Cost of goods sold |
|
$1,145.5 |
|
$1,145.4 |
|
$1,151.2 |
|
$1,154.0 |
|
$1,181.9 |
|
$1,176.6 |
| Net income (loss) |
|
26.6 |
|
26.7 |
|
30.5 |
|
28.7 |
|
(15.9) |
|
(12.6) |
Our ability to work as an integrated business, as opposed to different units, has given us opportunities to
reduce production overhead costs and to take advantage of economies of scale in purchasing, customer service,
freight and other areas common to all of our facilities. Our newest initiative to reduce our variable
manufacturing and transactional costs is the introduction of a company-wide Six Sigma process during fiscal
2002. Six Sigma is a process improvement methodology that has a relentless focus on customer needs and
delivering significant bottom line results. It is a disciplined, data-driven approach and methodology for
eliminating defects in any process, from manufacturing to transactional and from product to service.
Gross Profit
| (% of Net Sales) |
|
First Quarter |
|
Second Quarter |
|
Third Quarter |
|
Fourth Quarter |
|
Fiscal Year |
|
|
|
|
|
|
| |
| 2000 |
20.3% |
19.3% |
18.3% |
19.1% |
19.2% |
| 2001 |
18.5 |
19.7 |
21.1 |
21.2 |
20.1 |
| 2002 |
21.6 |
20.3 |
21.0 |
18.3 |
20.3 |
Gross profit for fiscal 2002 increased 0.2% to $291.0 million from $290.5 million for fiscal 2001. Gross
profit as a percentage of net sales increased to 20.3% for fiscal 2002 from 20.1% for fiscal 2001.
Gross profit for fiscal 2001 increased 3.2% to $290.5 million from $281.4 million for fiscal 2000. Gross
profit as a percentage of net sales increased to 20.1% for fiscal 2001 from 19.2% for fiscal 2000.
See also Cost of Goods Sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for fiscal 2002 increased 9.1% to $189.7 million from
$173.9 million for fiscal 2001. Selling, general and administrative expenses as a percentage of net sales for
fiscal 2002 increased to 13.2% from 12.1% for fiscal 2001. The increase in selling, general and administrative
expenses as a percentage of net sales for fiscal 2002 resulted primarily from growth initiatives at our
merchandising display business, higher compensation expenses associated with incentive compensation, higher
health and property insurance costs, and expenses incurred in connection with our Six Sigma quality and
process improvement program instituted in October 2001.
Selling, general and administrative expenses for fiscal 2001 increased 1.8% to $173.9 million from
$170.9 million for fiscal 2000. Selling, general and administrative expenses as a percentage of net sales for
fiscal 2001 increased to 12.1% from 11.7% for fiscal 2000. The increase in selling, general and administrative
expenses as a percentage of net sales for fiscal 2001 resulted primarily from increased compensation expenses
in relation to net sales.
Acquisitions
During fiscal 2002, we acquired substantially all of the assets of Athena Industries, Inc., a designer and
manufacturer of permanent point-of-purchase displays and fixtures with expertise in wire and metal
fabrication located in Burr Ridge, Illinois, and certain assets of Advertising Display Company, Inc., a producer
of temporary and permanent point-of-purchase displays, including its display operations in Memphis,
Tennessee. The results of operations of Athena Industries and Advertising Display Company have been
included in our consolidated statements of operations after March 21, 2002 and November 30, 2001,
respectively, the dates of acquisition.
In accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations,"
these acquisitions are accounted for under the purchase method of accounting, which requires that we record
the assets and liabilities of the acquisitions at their estimated fair value with the excess of the purchase price
over these amounts recorded as goodwill. Total cash consideration paid for the acquisitions was $25.4 million.
Additional contingent cash consideration of up to an aggregate of $1.25 million may be paid based on the
achievement of gross profit goals through calendar year 2003. Final adjustments to the purchase price will be
made based on finalization of the amount of working capital acquired. Estimated goodwill of approximately
$9.0 million, which is deductible for tax purposes, was recorded in connection with the acquisitions in our
merchandising displays and corrugated packaging segment. The pro forma impact of the acquisitions is not
material to the financial results for the year ended September 30, 2002.
Plant Closing and Other Costs
During fiscal 2002, we incurred plant closing and other costs related to announced facility closings. We
generally accrue the cost of employee terminations at the time of notification to the employees. Certain other
costs, such as moving and relocation costs, are expensed as incurred. These plant closing costs include the
closing of a laminated paperboard products plant in Vineland, New Jersey, a corrugating plant in Dothan,
Alabama and a folding carton plant in El Paso, Texas. The closures resulted in the termination of
approximately 190 employees. In connection with these closings, we incurred charges of $11.6 million during
fiscal 2002 which consisted mainly of asset impairment, severance, equipment relocation, disposal costs and
related expenses. Payments of $0.4 million were made during fiscal 2002. The remaining liability at
September 30, 2002 is approximately $2.3 million. Plant closing and other costs are not allocated to the
respective segments for financial reporting purposes. Had these costs been allocated, $2.3 million would have
been charged to the packaging products segment, $0.7 million would have been charged to the merchandising
displays and corrugated packaging segment, and $8.6 million would have been charged to the paperboard
segment. We have consolidated the operations of the Vineland laminated paperboard products plant and will
consolidate the operations of the Dothan corrugating plant and the El Paso folding carton plant into other
existing facilities.
During fiscal 2002, we decided to permanently shut down the specialty paper machine at our Dallas,
Texas mill and the No. 1 paper machine at our Lynchburg, Virginia specialty mill, and determined that
certain equipment in our folding carton division was impaired. As a result, we incurred impairment charges of
$6.1 million during fiscal 2002. Had these costs been allocated, $1.1 million would have been charged to our
packaging products segment and $5.0 million would have been charged to the paperboard segment.
During fiscal 2001, we closed a folding carton plant in Augusta, Georgia and an interior packaging plant
in Eaton, Indiana. The closures resulted in the termination of approximately 210 employees. In connection
with these closings, we incurred charges of $1.3 million and $6.2 million during fiscal 2002 and 2001,
respectively, which consisted mainly of asset impairment, severance, equipment relocation, disposal costs and
related expenses. Payments of $1.4 and $0.8 million were made in fiscal 2002 and 2001, respectively, and we
made an accrual adjustment of $0.2 million to increase the liability during fiscal 2002. The remaining liability
at September 30, 2002 is $0.3 million. Plant closing and other costs are not allocated to the respective
segments for financial reporting purposes. Had these costs been allocated, $1.3 million and $6.2 million would
have been charged to the packaging products segment in fiscal 2002 and 2001, respectively. We have
consolidated the operations of the Augusta folding plant and the Eaton interior packaging plant into other
existing facilities.
During fiscal 2000, we closed a laminated paperboard products plant in Lynchburg, Virginia and folding
carton plants in Chicago, Illinois, Norcross, Georgia and Madison, Wisconsin. The closures resulted in the
termination of approximately 550 employees. In connection with these closings, we incurred charges of
$61.1 million during fiscal 2000, which consisted mainly of asset impairment, severance, equipment relocation,
lease write-downs and other related expenses, including business interruption and other ineffciencies. Of the
$61.1 million, $46.0 million represented asset impairment charges related to the determination of material
diminution in the value of assets, including goodwill of $25.4 million (which is not deductible for tax
purposes), relating to our two folding carton plants that use web offset technology as well as assets relating to
the other closed facilities. We made payments of $0.7 million, $2.4 million and $12.6 million in fiscal 2002,
2001 and 2000, respectively. We have a nominal remaining liability at September 30, 2002. Plant closing and
other costs are not allocated to the respective segments for financial reporting purposes. Had these costs been
allocated, $50.2 million would have been charged to the packaging products segment, $9.3 million would have
been charged to the paperboard segment and $1.6 million would have been non-allocated in fiscal 2000. We
have consolidated the operations of these closed plants into other existing facilities.
During fiscal 2000, we decided to remove certain equipment from service primarily in our laminated
paperboard products division. As a result of this decision, we incurred impairment charges of $4.6 million
related to this equipment.
Segment Operating Income
Operating Income - Packaging Products Segment
Operating income attributable to the packaging products segment for fiscal 2002 increased 5.0% to
$50.5 million from $48.1 million for fiscal 2001. Operating margin for fiscal 2002 was 6.4% compared to 6.0%
for fiscal 2001. The increase in operating margin primarily resulted from operational effciencies in our folding
carton and interior packaging operations gained from capital expenditures focused on reducing our manufacturing
costs and from plant consolidations in fiscal 2000 and 2001. These results were partially offset by lower
volumes in our plastic packaging business in the first half of fiscal 2002 as well as the impact of higher resin
prices.
Operating income attributable to the packaging products segment for fiscal 2001 increased 21.2% to
$48.1 million from $39.7 million for fiscal 2000. Operating margin for fiscal 2001 was 6.0% compared to 5.0%
for fiscal 2000. The increase in operating margin primarily resulted from operational effciencies in our folding
carton operations gained through plant consolidations in fiscal 2000 and 2001.
Operating Income - Merchandising Displays and Corrugated Packaging Segment
Operating income attributable to this segment for fiscal 2002 increased 8.6% to $32.8 million from
$30.2 million for fiscal 2001. Operating margin for fiscal 2002 decreased to 11.3% from 11.5% in fiscal 2001.
The decrease in operating margin resulted from lower sales volumes in our corrugated packaging business due
to generally weaker market conditions as well as an increase in fixed costs to support the growth of the
merchandising display business.
Operating income attributable to this segment for fiscal 2001 increased 9.4% to $30.2 million from
$27.6 million for fiscal 2000. Operating margin for fiscal 2001 decreased to 11.5% from 11.6% in fiscal 2000.
The decrease in operating margin resulted from lower sales volumes in our corrugated packaging business due
to generally weaker market conditions.
Operating Income - Paperboard Segment
(a) Recycled Paperboard Tons Shipped and Average Recycled Paperboard Price Per Ton include tons
shipped by Seven Hills Paperboard, LLC, our joint venture with Lafarge Corporation.
(b) The method of computation of the Average Recycled Paperboard and Corrugated Medium Prices and
the Weighted Average Recovered Paper Cost has been revised, and the amounts restated, for all periods
shown, to better reflect their impact on our segment operating results. The Average Recycled Paperboard
and Corrugated Medium Prices represent the average gross sales price per manufactured ton shipped
adjusted for volume discounts and freight billed or allowed. The Average Recycled Paperboard and
Corrugated Medium Prices are not adjusted for payment discounts or sales returns and allowances. The
Weighted Average Recovered Paper Cost represents the average cost of fiber per manufactured ton
shipped, including related freight and brokerage costs.
Operating income attributable to the paperboard segment for fiscal 2002 decreased 42.1% to $24.1 million
from $41.6 million for fiscal 2001. Operating margin for fiscal 2002 decreased to 4.7% from 7.9% in fiscal 2001.
The decrease in operating margin resulted from weaker market conditions as well as the impact of higher fiber
costs. Sales of laminated paperboard products declined due to a decrease in demand by customers in the book
and ready to assemble furniture industries. The reduced sales volumes of laminated paperboard products
contributed to the decline in operating income of our specialty paperboard division, however, the decline was
partially offset by improvements resulting from our gypsum linerboard joint venture. Operating income in our
coated paperboard division declined due to lower pricing and a longer and more costly than expected capital
improvement shutdown of our Battle Creek mill. The decreases in operating margin of our mills were also
attributable to rising fiber prices during the last half of fiscal 2002 that were not fully passed through to
customers, but were partially offset by lower energy prices. Increasing prices and demand of recovered fiber
increased the operating margin of our recycled fiber division, partially offsetting the declines in operating
margin of the other divisions within the paperboard segment.
Operating income attributable to the paperboard segment for fiscal 2001 decreased 19.1% to $41.6 million
from $51.4 million for fiscal 2000. Operating margin for fiscal 2001 decreased to 7.9% from 8.7% in fiscal 2000.
The decrease in operating margin was primarily the result of higher energy costs that were not fully passed on
to customers, as well as a general economic downturn in the book and ready to assemble furniture industries.
The significant decline in recycled fiber prices further contributed to the decrease in operating margin for the
paperboard segment.
Interest Expense
Interest expense for fiscal 2002 decreased 24.6% to $26.4 million from $35.0 million for fiscal 2001 and
decreased 1.4% to $35.0 million from $35.5 million for fiscal 2000. The decreases for both fiscal 2002 and
fiscal 2001 resulted from decreases in average outstanding borrowings and lower interest rates compared to the
prior year.
Minority Interest
Minority interest in income of our consolidated subsidiary for fiscal 2002 increased 25.0% to $3.0 million
from $2.4 million in 2001. The increase was primarily due to operating effciencies gained through plant
consolidations in our interior packaging business during fiscal 2001.
Minority interest in income of our consolidated subsidiary for fiscal 2001 decreased 52.0% to $2.4 million
from $5.0 million for fiscal 2000. The decline was due to decreased income in the joint venture resulting from
reduced volumes in the interior packaging business primarily due to the loss of one large customer with whom
we have had a long-term contract.
Provision for Income Taxes
Provision for income taxes for fiscal 2002 decreased to $21.3 million from $21.9 million for fiscal 2001.
Our effective tax rate for fiscal 2002 decreased to 39.7% from 42.0% for fiscal 2001. The decline in the
effective rate is primarily due to non-tax deductible goodwill amortization in fiscal 2001.
Provision for income taxes for fiscal 2001 increased to $21.9 million from $11.6 million for fiscal 2000.
Excluding the effect of the $25.4 million non-cash write-off during fiscal 2000 of the goodwill associated with
the impairment of assets at two facilities acquired in the Waldorf acquisition, which is non-deductible for tax
purposes, our effective tax rate decreased to 42.0% for fiscal 2001 compared to 54.9% for fiscal 2000. The
decrease in the effective tax rate in fiscal 2001 primarily resulted from non-tax deductible goodwill
amortization comprising a lower percentage of pre-tax net income.
Net Income (Loss) and Diluted Earnings (Loss) Per Common Share
Net income for fiscal 2002 was $26.6 million compared to net income of $30.5 million for fiscal 2001. Net
income as a percentage of net sales was 1.9% for fiscal 2002 compared to 2.1% for fiscal 2001. Diluted earnings
per share for fiscal 2002 was $0.77 compared to diluted earnings per share of $0.91 for fiscal 2001.
Net income for fiscal 2001 was $30.5 million compared to a net loss of $15.9 million for fiscal 2000. Net
income as a percentage of net sales was 2.1% for fiscal 2001 compared to a net loss as a percentage of net sales
of 1.1% for fiscal 2000. Diluted earnings per share for fiscal 2001 was $0.91 compared to a diluted loss per
share of $0.46 for fiscal 2000.
Liquidity and Capital Resources
Working Capital and Capital Expenditures
We have funded our working capital requirements and capital expenditures from net cash provided by
operating activities, borrowings under term notes and bank credit facilities and proceeds received in
connection with the issuance of industrial revenue bonds and debt and equity securities. We have a revolving
credit facility under which we have aggregate borrowing availability of $300 million through fiscal 2005. At
September 30, 2002, we had $2.4 million outstanding under our revolving credit facility. Additionally, we
maintain a $24.8 million synthetic lease facility. The facility expires in April 2004 unless it is extended
pursuant to two five-year renewal terms. At September 30, 2002, obligations outstanding under this facility
were $24.5 million, relating to three of our operating facilities. The synthetic lease qualifies as an operating
lease for accounting purposes and is not reflected as an asset or a liability on our balance sheet. The lease
payments are reflected in the income statement as operating expenses and we depreciate the underlying assets
for tax purposes. In connection with this facility, we have the right to acquire the leased property for the
lessor's original cost plus related costs and expenses and have made a residual value guarantee for the leased
property equal to 85% of the financing. This residual value guarantee equates to approximately $20.8 million.
Cash and cash equivalents, $6.6 million at September 30, 2002, increased from $5.2 million at September 30,
2001.
Net cash provided by operating activities for fiscal 2002 was $117.6 million compared to $146.0 million
for fiscal 2001. This decrease was primarily the result of decreased earnings and a decrease in accrued
liabilities during fiscal 2002. Net cash used for investing activities was $95.1 million for fiscal 2002 consisting
primarily of capital expenditures and purchase of businesses compared to $79.9 million for fiscal 2001 which
consisted primarily of capital expenditures. Net cash used for financing activities aggregated $22.0 million for
fiscal 2002 and consisted primarily of net repayments of debt and quarterly dividend payments, partially offset
by proceeds received in conjunction with monetizing our swap agreements. Net cash used for financing
activities aggregated $66.6 million for fiscal 2001 and consisted primarily of net repayments of debt and
quarterly dividend payments.
Net cash provided by operating activities for fiscal 2001 was $146.0 million compared to $102.4 million
for fiscal 2000. This increase was primarily the result of increased earnings before depreciation and
amortization and a positive change in operating assets and liabilities during fiscal 2001 over fiscal 2000. Net
cash used for investing activities was $79.9 million for fiscal 2001 compared to $101.3 million for fiscal 2000
and consisted primarily of capital expenditures in both years. Net cash used for financing activities aggregated
$66.6 million for fiscal 2001 and consisted primarily of net repayments of debt and quarterly dividend
payments. Net cash used for financing activities was $0.1 million for fiscal 2000 and consisted primarily of
purchases of common stock and quarterly dividend payments, offset by additional borrowings under our
revolving credit facility.
Our capital expenditures aggregated $77.6 million for fiscal 2002. We used these expenditures primarily
for the purchase and upgrading of machinery and equipment.
We estimate that our capital expenditures will aggregate approximately $60 million in fiscal 2003. We
intend to use these expenditures for the purchase and upgrading of machinery and equipment and for building
expansions and improvements. We believe that our financial position would support higher levels of capital
expenditures, if justified by opportunities to increase revenues or reduce costs, and we continuously review new
investment opportunities. Accordingly, it is possible that our capital expenditures in fiscal 2003 could be
higher than currently anticipated.
We anticipate that we will be able to fund our capital expenditures, interest payments, stock repurchases,
dividends and working capital needs for the foreseeable future from cash generated from operations,
borrowings under our revolving credit facility, proceeds from the issuance of debt or equity securities or other
additional long-term debt financing.
In October 2002, our Board of Directors approved a resolution to increase our quarterly dividend to $0.08
per share, or $0.32 per year, on our Class A Common Stock. We believe that this increase was warranted by
the reduction in our debt levels over the past two years and our lower level of expected capital expenditures in
relation to the cash flows that our business has been generating.
The following table summarizes our contractual obligations at September 30, 2002, and the effect such
obligations are expected to have on our liquidity and cash flow in future periods (in thousands):
| |
|
Maturity
less 1 yr |
|
Maturity
1-3 yrs |
|
Maturity
4-5 yrs |
|
Maturity
Over 5 yrs |
|
|
|
|
|
| |
| Debt principal and other |
$62,917 |
$100,574 |
$ 6,153 |
$283,596 |
| Operating leases |
11,213 |
12,820 |
7,728 |
26,313 |
|
|
|
|
|
| Total commitments |
$74,130 |
$113,394 |
$13,881 |
$309,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes our fair value contracts at September 30, 2002 (in thousands):
| Derivative Type |
|
Maturity
less 1 yr |
|
Maturity
1-3 yrs |
|
Maturity
4-5 yrs |
|
Maturity
Over 5 yrs |
|
Total Fair
Value(1) |
|
|
|
|
|
|
| |
| Interest rate swaps (fair value hedges) |
$--- |
$1,925 |
$--- |
$1,133 |
$3,058 |
| Interest rate swaps (cash flow hedges) |
(198) |
--- |
--- |
--- |
(198) |
| Interest rate swaps and caps (other) |
(87) |
--- |
--- |
--- |
(87) |
| Foreign currency forwards |
47 |
--- |
--- |
--- |
47 |
| Commodity swaps |
61 |
--- |
--- |
--- |
61 |
(1) The source of fair value for each of our contracts was other external sources.
For information concerning certain related party transactions, please see Note 9, "Related Party
Transactions" of the Notes to Consolidated Financial Statements section of the Financial Statements included
herein.
Joint Venture
On February 18, 2000, we formed a joint venture with Lafarge Corporation to produce gypsum paperboard
liner for Lafarge's U.S. drywall manufacturing plants. Lafarge owns 51% and we own 49% of the joint venture.
Funding of net losses is guaranteed by both partners in their proportionate share of ownership. The joint venture,
Seven Hills Paperboard, LLC, owns and operates a paperboard machine located at our Lynchburg, Virginia mill.
Under the terms of our Seven Hills joint venture arrangement, Lafarge Corporation is required to purchase all of
the gypsum paperboard liner produced by Seven Hills. We have contributed a portion of our existing Lynchburg
assets valued at approximately $4.0 million to the venture. Additionally, we contributed cash of $1.7 million,
$9.6 million and $7.1 million during fiscal year 2002, 2001 and 2000, respectively, which was used to rebuild the
paperboard machine and fund working capital requirements. Of the total cash contributed to the joint venture,
contributions for capital expenditures amounted to $0.4 million, $7.7 million and $7.1 million during fiscal 2002,
2001 and 2000, respectively. During fiscal 2002 and 2001, our share of the operating loss incurred at Seven Hills
Paperboard amounted to $0.3 million and $2.0 million, respectively.
Stock Repurchase Program
In November 2000, the Executive Committee of the Board of Directors amended our stock repurchase
plan to allow for the repurchase from time to time prior to July 31, 2003 of up to 2.1 million shares of Class A
common stock in open market transactions on the New York Stock Exchange or in private transactions. We
did not repurchase any shares of Class A common stock during fiscal 2002. During fiscal 2001, we repurchased
0.3 million shares of Class A common stock of which 4,300 shares were repurchased since the amendment,
and we repurchased 2.1 million shares of Class A common stock during fiscal 2000. As of September 30, 2002,
we have 2.1 million shares available for repurchase prior to July 31, 2003.
Expenditures for Environmental Compliance
For a discussion of our expenditures for environmental compliance, please see Item 1, "Business -
Governmental Regulation - Environmental Regulation."
New Accounting Standards
In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). This
statement applies to all exit or disposal activities initiated after December 31, 2002 and requires companies to
recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination
costs and certain employee severance costs that are associated with a restructuring, discontinued operation,
plant closing, or other exit or disposal activity. We will adopt this accounting standard for all exit or disposal
activities initiated after December 31, 2002.
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This
statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and
supercedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." SFAS 144 is effective for fiscal years beginning
after December 15, 2001. We have adopted SFAS 144 as of October 1, 2002 and do not expect the
pronouncement to have a material impact on the consolidated financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). This statement changed the
accounting for goodwill from an amortization method to an impairment only approach. We adopted SFAS 142
in the first quarter of fiscal 2002 and determined that $8.2 million of the total goodwill associated with our
laminated paperboard products business was impaired. As a result, we recognized a charge of $5.8 million, net
of tax, from the cumulative effect of a change in accounting principle.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as
amended. This statement requires the fair value of derivatives to be recorded as assets or liabilities. Gains or
losses resulting from changes in the fair values of derivatives are accounted for currently in earnings or
comprehensive income depending on the purpose of the derivatives and whether they qualify for special hedge
accounting treatment. We adopted SFAS 133 in the first quarter of fiscal 2001, resulting in income of
$0.3 million, net of tax, from the cumulative effect of a change in accounting principle.
Forward-Looking Statements
Statements herein regarding, among other things, estimated capital expenditures for fiscal 2003 and
expected expenditures for environmental compliance, constitute forward-looking statements within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such statements are subject
to certain risks and uncertainties that could cause actual amounts to differ materially from those projected.
With respect to these forward-looking statements, management has made assumptions regarding, among other
things, the amount and timing of expected capital expenditures, the estimated cost of compliance with
environmental laws, the expected resolution of various pending environmental matters and competitive
conditions in our businesses and general economic conditions. These forward-looking statements are subject to
certain risks including, among others, that the amount of capital expenditures has been underestimated and
that the impact on our results of those capital expenditures has been overestimated; the cost of compliance
with environmental laws has been underestimated; and expected outcomes of various pending environmental
matters are inaccurate. In addition, our performance in future periods is subject to other risks including,
among others, decreases in demand for our products, increases in raw material costs, fluctuations in selling
prices and adverse changes in general market and industry conditions. We believe these estimates are
reasonable; however, undue reliance should not be placed on such estimates, which are based on current
expectations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates, foreign exchange rates and commodity
prices. To mitigate these risks, we enter into various hedging transactions. The sensitivity analyses presented
below do not consider the effect of possible adverse changes in the economy generally, nor do they consider
additional actions management may take to mitigate its exposure to such changes.
Derivative Instruments
We enter into a variety of derivative transactions. We use interest rate cap agreements and interest rate
swap agreements to manage the interest rate characteristics of a portion of our outstanding debt. We use
forward contracts to limit exposure to fluctuations in Canadian foreign currency rates with respect to our
receivables denominated in Canadian dollars. We also use commodity swap agreements to limit our exposure
to falling sales prices and rising raw material costs.
For each derivative instrument that is designated and qualifies as a fair value hedge, the gain or loss on
the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged
risk are recognized in current earnings during the period of the changes in fair values. For each derivative
instrument that is designated and qualifies as a cash flow hedge, the effective portion of the gain or loss on the
derivative instrument is reported as a component of accumulated other comprehensive loss and reclassified
into earnings in the same period or periods during which the hedged transaction affects earnings. The
remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of
future cash flows of the hedged item, if any, is recognized in current earnings during the period of change.
Gains or losses on the termination of interest rate swap agreements are deferred and amortized as an
adjustment to interest expense of the related debt instrument over the remaining term of the original contract
life of the terminated swap agreements. For derivative instruments not designated as hedging instruments, the
gain or loss is recognized in current earnings during the period of change. Fair value of cash flow hedges are
included in other long-term liabilities and other assets on the balance sheet.
During fiscal 2002, we realized cash proceeds of $17.1 million by terminating the interest rate swaps that
were designated as fair value hedges of our fixed rate debt and entering into comparable replacement interest
rate swaps at then-current market levels. No material impact on net income or change in interest rate risk is
expected from these transactions relative to our position prior to entering into these transactions.
Interest Rate
We are exposed to changes in interest rates, primarily as a result of our short-term and long-term debt
with both fixed and floating interest rates. From time to time, we use interest rate agreements effectively to
cap the LIBOR rate on the variable rate portions of our debt portfolio. If market interest rates averaged 1%
more than actual rates in 2002, our interest expense, after considering the effects of interest rate swap and cap
agreements, would have increased and income before taxes would have decreased by approximately
$3.3 million. Comparatively, if market interest rates averaged 1% more than actual rates in fiscal 2001, our
interest expense, after considering the effects of interest rate swap agreements, would have increased and
income before taxes would have decreased by approximately $4.1 million. These amounts are determined by
considering the impact of the hypothetical interest rates on our borrowing costs and interest rate swap and cap
agreements. These analyses do not consider the effects of changes in the level of overall economic activity that
could exist in such an environment.
Foreign Currency
We are exposed to changes in foreign currency rates with respect to our foreign currency-denominated
operating revenues and expenses. We principally use forward contracts to limit exposure to fluctuations in
Canadian foreign currency rates, our largest exposure.
For fiscal 2002, a uniform 10% strengthening in the value of the dollar relative to the currency in which
our sales are denominated would have resulted in an increase in gross profit of $0.8 million for fiscal 2002.
Comparatively, for fiscal 2001, a uniform 10% strengthening in the value of the dollar relative to the currency
in which our sales are denominated would have resulted in an increase in gross profit of $0.5 million for fiscal
2001. This calculation assumes that each exchange rate would change in the same direction relative to the
U.S. dollar.
In addition to the direct effect of changes in exchange rates on the dollar value of the resulting sales,
changes in exchange rates also affect the volume of sales or the foreign currency sales price as competitors'
products become more or less attractive. Our sensitivity analysis of the effects of changes in foreign currency
exchange rates does not factor in a potential change in sales levels or local currency prices.
Commodities
We sell recycled medium to various customers. The principal raw material used in the production of
medium is old corrugated containers, or "OCC." Medium prices and OCC costs fluctuate widely due to
changing market forces. As a result, we make use of swap agreements to limit our exposure to falling selling
prices and rising raw material costs of a portion of our recycled medium business. We estimate market risk as
a hypothetical 10% decrease in selling prices or a 10% increase in raw material costs. With the effect of our
medium swaps, such a decrease would have resulted in lower sales of $6.3 million during fiscal 2002. With the
effect of our OCC swaps, such an increase would have resulted in higher costs of purchases of $2.6 million
during fiscal 2002.
In 2001, we estimated market risk as a hypothetical 10% decrease in selling prices or a 10% increase in
raw material costs. With the effect of our medium swaps, such a decrease would have resulted in lower sales of
$6.7 million during fiscal 2001. With the effect of our OCC swaps, such an increase would have resulted in
higher costs of purchases of $2.0 million during fiscal 2001.
We purchase and sell a variety of commodities that are not subject to derivative commodity instruments,
including OCC, paperboard and recovered paper. Fluctuations in market prices of these commodities could
have a material effect on our results of operations. Such fluctuations are not reflected in the results above.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For supplemental quarterly financial information, please see Note 12, ""Financial Results by Quarter
(Unaudited)'' of the Notes to Consolidated Financial Statements included herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
|
|
|
