UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 0-23340

Rock-Tenn Company

(Exact Name of Registrant as Specified in Its Charter)

Georgia (State or Other Jurisdiction of Incorporation or Organization)		62-0342590 (I.R.S. Employer Identification No.)
504 Thrasher Street, Norcross, Georgia (Address of Principal Executive Offices)		30071 (Zip Code)

Registrant’s Telephone Number, Including Area Code: (770) 448-2193

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer þ		Accelerated filer o
Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class		Outstanding as of July 31, 2008
Class A Common Stock, $0.01 par value		38,170,063

 

 

ROCK-TENN COMPANY
INDEX

						Page
PART I				FINANCIAL INFORMATION
		Item 1.		Financial Statements (Unaudited)
				Condensed Consolidated Statements of Income for the three and nine months ended June 30, 2008 and 2007			1
				Condensed Consolidated Balance Sheets at June 30, 2008 and September 30, 2007			2
				Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2008 and 2007			3
				Notes to Condensed Consolidated Financial Statements			5
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk			35
		Item 4.		Controls and Procedures			36
PART II				OTHER INFORMATION
		Item 1.		Legal Proceedings			36
		Item 1A.		Risk Factors			37
		Item 6.		Exhibits			37
				Index to Exhibits			39
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
EX-32.1 SECTION 906, CERTIFICATION OF THE CEO AND CFO

PART I: FINANCIAL INFORMATION

Item 1.		FINANCIAL STATEMENTS (UNAUDITED)

ROCK-TENN COMPANY

(Unaudited)
(In Millions, Except Per Share Data)

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Net sales		$	771.0			$	591.4			$	2,053.2			$	1,711.0
Cost of goods sold			626.3				472.2				1,675.6				1,381.8
Gross profit			144.7				119.2				377.6				329.2
Selling, general and administrative expenses			85.4				65.7				225.9				190.5
Restructuring and other costs, net			3.7				0.6				7.5				2.3
Operating profit			55.6				52.9				144.2				136.4
Interest expense			(27.6	)			(11.8	)			(61.0	)			(37.1	)
Interest and other income (expense), net			0.8				(1.3	)			0.8				(1.1	)
Equity in income of unconsolidated entities			1.0				0.6				0.9				1.3
Minority interest in income of consolidated subsidiaries			(1.7	)			(0.8	)			(3.8	)			(3.8	)
Income before income taxes			28.1				39.6				81.1				95.7
Income tax expense			(9.3	)			(14.4	)			(27.7	)			(33.7	)
Net income		$	18.8			$	25.2			$	53.4			$	62.0
Weighted average diluted shares outstanding			38.4				40.1				38.2				39.6
Basic earnings per share:
Net income		$	0.50			$	0.64			$	1.43			$	1.61
Diluted earnings per share:
Net income		$	0.49			$	0.63			$	1.40			$	1.57
Cash dividends paid per common share		$	0.10			$	0.10			$	0.30			$	0.29

See Accompanying Notes to Condensed Consolidated Financial Statements

ROCK-TENN COMPANY

(Unaudited)
(In Millions, Except Per Share Data)

		June 30,				September 30,
		2008				2007
ASSETS
Current Assets:
Cash and cash equivalents		$	56.9			$	10.9
Restricted cash			7.8				—
Accounts receivable (net of allowances of $8.8 and $5.4)			296.8				230.6
Inventories			279.0				224.4
Other current assets			34.0				26.8
Assets held for sale			—				1.8
Total current assets			674.5				494.5
Property, plant and equipment at cost:
Land and buildings			392.5				274.8
Machinery and equipment			1,818.3				1,368.6
Transportation equipment			18.3				10.8
Leasehold improvements			6.9				5.9
			2,236.0				1,660.1
Less accumulated depreciation and amortization			(888.7	)			(822.6	)
Net property, plant and equipment			1,347.3				837.5
Goodwill			737.3				364.5
Intangibles, net			183.6				67.6
Investment in unconsolidated entities			31.1				28.9
Restricted cash and marketable debt securities			11.4				—
Other assets			38.4				7.7
		$	3,023.6			$	1,800.7
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of debt		$	247.2			$	46.0
Accounts payable			239.5				161.6
Accrued compensation and benefits			76.6				73.8
Other current liabilities			73.2				63.5
Total current liabilities			636.5				344.9
Long-term debt due after one year			1,510.8				667.8
Hedge adjustments resulting from terminated fair value interest rate derivatives or swaps			7.1				8.5
Total long-term debt			1,517.9				676.3
Accrued pension and other long-term benefits			36.9				47.3
Deferred income taxes			150.4				125.7
Other long-term liabilities			25.7				7.6
Commitments and contingencies (Note 12)
Minority interest			16.1				9.9
Shareholders’ equity:
Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares outstanding			—				—
Class A common stock, $0.01 par value; 175,000,000 shares authorized; 38,183,512 and 37,988,779 shares outstanding at June 30, 2008 and September 30, 2007, respectively			0.4				0.4
Capital in excess of par value			234.0				222.6
Retained earnings			397.0				357.8
Accumulated other comprehensive income			8.7				8.2
Total shareholders’ equity			640.1				589.0
		$	3,023.6			$	1,800.7

See Accompanying Notes to Condensed Consolidated Financial Statements

ROCK-TENN COMPANY

(Unaudited)
(In Millions)

		Nine Months Ended
		June 30,
		2008				2007
Operating activities:
Net income		$	53.4			$	62.0
Items in income not affecting cash:
Depreciation and amortization			96.6				77.5
Deferred income tax (benefit) expense			(0.4	)			11.8
Share-based compensation expense			7.2				5.3
(Gain) loss on disposal of plant, equipment and other, net			(0.7	)			0.5
Minority interest in income of consolidated subsidiaries			3.8				3.8
Equity in income of unconsolidated entities			(0.9	)			(1.3	)
Proceeds from (payment on) termination of cash flow interest rate hedges			6.9				(0.2	)
Pension funding more than expense			(9.3	)			(11.2	)
Impairment adjustments and other non-cash items			0.3				1.0
Change in operating assets and liabilities, net of acquisitions:
Accounts receivable			(15.8	)			(2.7	)
Inventories			5.1				1.3
Other assets			(2.4	)			(2.0	)
Accounts payable			19.0				(9.6	)
Income taxes payable			1.7				(0.4	)
Accrued liabilities			(7.5	)			5.2
Net cash provided by operating activities			157.0				141.0
Investing activities:
Capital expenditures			(59.7	)			(58.7	)
Cash paid for purchase of business (including amounts paid into escrow), net of cash received			(817.9	)			(32.1	)
Investment in unconsolidated entities			(0.2	)			(9.5	)
Return of capital from unconsolidated entities			0.6				6.3
Proceeds from sale of property, plant and equipment			6.3				2.6
Proceeds from property, plant and equipment insurance settlement			—				1.3
Net cash used for investing activities			(870.9	)			(90.1	)
Financing activities:
Proceeds from issuance of notes			198.6				—
Additions to revolving credit facilities			202.3				46.6
Repayments of revolving credit facilities			(195.3	)			(72.5	)
Additions to debt			764.0				22.1
Repayments of debt			(169.9	)			(69.8	)
Debt issuance costs			(26.5	)			—
Restricted cash and investments			(0.4	)			—
Issuances of common stock			2.4				29.7
Excess tax benefits from share-based compensation			1.0				14.4
Advances from (repayments to) unconsolidated entity			0.5				(5.9	)
Cash dividends paid to shareholders			(11.4	)			(11.4	)
Cash distributions paid to minority interest			(5.3	)			(2.7	)
Net cash provided by (used for) financing activities			760.0				(49.5	)
Effect of exchange rate changes on cash and cash equivalents			(0.1	)			(0.2	)
Increase in cash and cash equivalents			46.0				1.2
Cash and cash equivalents at beginning of period			10.9				6.9
Cash and cash equivalents at end of period		$	56.9			$	8.1
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds		$	23.7			$	7.8
Interest, net of amounts capitalized			41.5				35.0

See Accompanying Notes to Condensed Consolidated Financial Statements

Supplemental schedule of non-cash investing and financing activities:

     Liabilities assumed in the table below primarily reflect the March 5, 2008 acquisition of Southern Container Corp. (“Southern Container” and “Southern Container Acquisition”). In conjunction with the Southern Container Acquisition, we also assumed debt (in millions):

		Nine Months Ended
		June 30, 2008
Fair value of assets acquired, including goodwill		$	1,185.1
Cash paid, net of cash received			817.9
Liabilities assumed		$	367.2
Included in liabilities assumed are the following items:
Debt assumed in acquisition		$	132.5
Cash payable to sellers in connection with the acquisition			113.1
Total debt assumed		$	245.6

     For additional information on the Southern Container Acquisition and financing see "Note 5. Acquisitions” and “Note 9. Debt".

     In the third quarter of fiscal 2007, we contributed assets to our Display Source Alliance, LLC joint venture. The assets consisted primarily of equipment and inventory.

     In conjunction with this investment, we contributed the following assets (in millions):

		Nine Months Ended
		June 30,
		2008				2007
Assets contributed to joint venture		$	—			$	3.9

See Accompanying Notes to Condensed Consolidated Financial Statements

ROCK-TENN COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Month Periods Ended June 30, 2008
(Unaudited)

     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, including RTS Packaging, LLC (“RTS”), Fold-Pak, LLC (“Fold-Pak”), GraphCorr LLC, Schiffenhaus Canada, Inc. and Schiffenhaus California, LLC. We own 65% of RTS and conduct our interior packaging products business through RTS. At September 30, 2006 we owned 60% of Fold-Pak and conducted some of our folding carton operations through Fold-Pak. In January 2007, we acquired the remaining 40% of Fold-Pak. Following the Southern Container Acquisition in March 2008, we own 68% of GraphCorr LLC, 66.67% of Schiffenhaus Canada, Inc. and 50% of Schiffenhaus California, LLC, through which we conduct some of our graphics corrugated manufacturing operations. Our references to the business of Rock-Tenn Company do not include the following entities that we do not consolidate but account for on the equity method of accounting: Seven Hills Paperboard, LLC (“Seven Hills”), Quality Packaging Specialists International, LLC (“QPSI”), Display Source Alliance, LLC (“DSA”), Pohlig Brothers, LLC (“Pohlig”) or Greenpine Road, LLC (“Greenpine”). Pohlig and Greenpine were acquired in the Southern Container Acquisition. We own 49% of Seven Hills, a manufacturer of gypsum paperboard liner, 23.96% of QPSI, a business providing merchandising displays, contract packing, logistics and distribution solutions, 45% of DSA, a business providing primarily permanent merchandising displays, 50% of Pohlig, a small folding carton manufacturer, and 50% of Greenpine, which owns the real property from which Pohlig operates.

Note 1. Interim Financial Statements

     Our independent public accounting firm has not audited our accompanying interim financial statements. We derived the condensed consolidated balance sheet at September 30, 2007 from the audited consolidated financial statements. In the opinion of our management, the condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of our results of operations for the three and nine months ended June 30, 2008 and 2007, our financial position at June 30, 2008 and September 30, 2007, and our cash flows for the nine months ended June 30, 2008 and 2007.

     We have condensed or omitted certain notes and other information from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these interim statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2007 (the “Fiscal 2007 Form 10-K”).

     The results for the three and nine months ended June 30, 2008 are not necessarily indicative of results that may be expected for the full year.

Note 2. New Accounting Standards

Recently Adopted Standards

     We adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109” (“FIN 48”) as of October 1, 2007. See “Note 7. Tax Provision”. We will be evaluating Southern Container’s tax positions in all jurisdictions where it is required to file income tax returns and applying the standards prescribed in FIN 48. Since Southern Container was a private company, FIN 48 did not apply to it prior to our acquisition. We anticipate completing our evaluation by September 30, 2008. However, based on our current preliminary analysis, we do not anticipate that the adoption of FIN 48 with respect to Southern Container will have a material impact on our consolidated financial statements.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Recently Issued Standards

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles in the United States (“GAAP”), and expands disclosures about fair value measurements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement would be determined based on the assumptions that market participants would use in pricing the asset or liability. SFAS 157, as issued, is effective for fiscal years beginning after November 15, 2007 (October 1, 2008 for us). In February 2008, the FASB issued FASB Staff Position 157-2 that deferred for one year the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually). Management is presently evaluating the impact, if any, upon adoption.

     In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) expands the definition of a business combination and requires the fair value of the purchase price of an acquisition, including the issuance of equity securities, to be determined on the acquisition date. SFAS 141(R) also requires that all assets, liabilities, contingent considerations, and contingencies of an acquired business be recorded at fair value at the acquisition date. In addition, SFAS 141(R) requires that acquisition costs generally be expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008 (October 1, 2009 for us) with early adoption prohibited. We are currently evaluating the effect the implementation of SFAS 141(R) will have on the consolidated financial statements.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51” (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests such that minority interests will be recharacterized as noncontrolling interests and will be required to be reported as a component of equity, and requires that purchases or sales of equity interests that do not result in a change in control be accounted for as equity transactions and, upon a loss of control, requires the interest sold, as well as any interest retained, to be recorded at fair value with any gain or loss recognized in earnings. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 (October 1, 2009 for us) with early adoption prohibited. We are currently evaluating the effect of the implementation of SFAS 160 will have on the consolidated financial statements.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008 (January 1, 2009 for us). We are currently evaluating the effect the implementation of SFAS 161 will have on the consolidated financial statements.

Note 3. Comprehensive Income

     The following are the components of comprehensive income (in millions):

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Net income		$	18.8			$	25.2			$	53.4			$	62.0
Foreign currency translation adjustments			1.0				9.3				(3.5	)			5.5
Reclassification of previously terminated hedges to earnings, net of tax			0.7				(0.8	)			0.5				(2.1	)
Net unrealized income (loss) on derivative instruments, net of tax			6.7				1.5				3.5				(0.2	)
Comprehensive income		$	27.2			$	35.2			$	53.9			$	65.2

     The change in other comprehensive income due to foreign currency translation was primarily due to the change in the Canadian/U.S. dollar exchange rates.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Note 4. Earnings per Share

     The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share data):

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Numerator:
Net income		$	18.8			$	25.2			$	53.4			$	62.0
Denominator:
Denominator for basic earnings per share — weighted average shares			37.5				39.3				37.4				38.4
Effect of dilutive stock options and restricted stock awards			0.9				0.8				0.8				1.2
Denominator for diluted earnings per share — weighted average shares and assumed conversions			38.4				40.1				38.2				39.6
Basic earnings per share:
Net income per share — basic		$	0.50			$	0.64			$	1.43			$	1.61
Diluted earnings per share:
Net income per share — diluted		$	0.49			$	0.63			$	1.40			$	1.57

     Options to purchase 0.3 million common shares were not included in computing diluted earnings per share in the three and nine months ended June 30, 2008, respectively, because the effect would have been antidilutive. Options to purchase 0.2 and 0.1 million common shares were not included in computing diluted earnings per share in the three and nine months ended June 30, 2007, respectively, because the effect would have been antidilutive.

Note 5. Acquisitions

Southern Container Acquisition

     On March 5, 2008, we acquired the stock of Southern Container Corp. The transaction had an effective date of March 2, 2008. We have included the results of Southern Container’s operations in our financial statements since that date in our Corrugated Packaging segment. We made the acquisition in order to expand our corrugated packaging business with the Southern Container operations that we believe have one of the lowest system costs and the highest EBITDA margins of any major integrated corrugated company in North America.

     The purchase price for the acquisition was $1,062.3 million, net of cash received of $54.0 million, including expenses. RockTenn and Southern Container expect to make an election under section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the “Code”) that will increase RockTenn’s tax basis in the acquired assets and result in a net present value benefit, subject to the completion of the final purchase price allocation, of approximately $150 million, net of tax gross-up payments of $68.7 million to be paid to Southern Container’s former stockholders by November 2008. We incurred $26.5 million of debt issuance costs in connection with the transaction. See “Note 9. Debt”.

     The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. We are in the process of analyzing the estimated values of assets and liabilities acquired and are obtaining third-party valuations of certain tangible and intangible assets and finalizing our operating plans and, thus, the allocation of the purchase price is preliminary and subject to material revision.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

     Opening balance effective March 2, 2008, revised as of June 30, 2008 (in millions):

Current assets, net of cash received		$	131.1
Property, plant, and equipment			538.4
Goodwill			373.3
Intangible assets			123.0
Other long-term assets			18.1
Total assets acquired			1,183.9
Current portion of debt			119.3
Current liabilities			86.0
Long-term debt due after one year			126.3
Minority interest and other long-term liabilities			35.6
			367.2
Total liabilities assumed
Net assets acquired		$	816.7

     We recorded estimated fair values for acquired assets and liabilities including goodwill and intangibles. We recorded $75.4 million of customer relationship intangibles, $18.1 million of trade names and trademarks and $29.5 million for a steam supply contract. None of the intangibles has significant residual value. The intangibles are expected to be amortized over estimated useful lives ranging from 11 to 40 years on a straight-line basis over a weighted average life of approximately 18 years, and 15 years for tax purposes. The goodwill is expected to be deductible for income tax purposes following the Code section 338(h) (10) election.

     The following unaudited pro forma information reflects our consolidated results of operations as if the Southern Container Acquisition had taken place as of the beginning of each of the periods presented. The pro forma information includes adjustments primarily for depreciation and amortization based on the estimated fair value of the acquired property, plant and equipment, amortization of acquired intangibles and interest expense on the acquisition financing debt. We have also added back the minority interest in the earnings of the Solvay mill subsidiary, since such interests were acquired by Southern Container prior to our acquisition; we have eliminated certain expenses that Southern Container historically incurred that the combined company does not expect to incur, due to changes in employment and other contractual arrangements. During the three months ended June 30, 2008, we have also eliminated certain non-recurring expenses directly associated with the acquisition primarily including $4.3 million of inventory step up expense and $2.1 million of deferred compensation expense funded into escrow through a purchase price reduction from Southern Container’s stockholders. During the nine months ended June 30, 2008, we eliminated certain non-recurring pre-tax expenses directly associated with the acquisition including $11.4 million of inventory step up expense, $3.0 million for an acquisition bridge financing fee, $1.9 million of unamortized financing fees from our prior credit facility and $2.8 million of deferred compensation expense. Pre-tax integration costs of $1.7 million and $2.8 million for the three and nine months ended June 30, 2008, respectively, are included in the pro forma net income below. The pro forma information is not necessarily indicative of the results of operations that we would have reported had the transaction actually occurred at the beginning of these periods nor is it necessarily indicative of future results.

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
(In millions, except per share data)		2008				2007				2008				2007
Net sales		$	771.0			$	717.8			$	2,342.4			$	2,121.4
Net income		$	22.3			$	27.0			$	79.4			$	75.7
Diluted earnings per common share		$	0.58			$	0.67			$	2.08			$	1.91

     Prior to the acquisition, Southern Container used a 52/53 week fiscal year and reported its results of operations in three 12-week periods and one 16-week period, with the 16-week period being the fourth period and ending on the last Saturday of the calendar year. The unaudited pro forma information above for the three and nine months ended June 30, 2008 and 2007 utilizes the condensed consolidated statements of income for RockTenn for the three and nine months ended June 30, 2008 and 2007 and the condensed consolidated statements of operations of Southern Container for the 25 weeks ended March 2, 2008 and the 12 and 40 weeks ended June 16, 2007.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Folding Cartons

     On January 24, 2007, we acquired for $32.0 million the remaining 40% minority interest in Fold-Pak, giving us sole ownership of the company. We acquired our initial 60% interest in Fold-Pak in connection with the Gulf States acquisition in June 2005. Fold-Pak makes paperboard-based food containers serving a very broad customer base and is a consumer of board from our bleached paperboard mill. We have included the results of these operations in our consolidated financial statements since that date in our Consumer Packaging segment. The Gulf States acquisition included $18.7 million of intangibles, primarily for customer relationships, and $3.5 million of goodwill. The goodwill is deductible for income tax purposes. We are amortizing the non-goodwill intangibles on a straight-line basis over a weighted average life of 19 years. The pro forma impact of the acquisition is not material to our financial results.

Note 6. Restructuring and Other Costs, Net

Summary of Restructuring and Other Initiatives

     We recorded pre-tax restructuring and other costs, net, of $3.7 million and $0.6 million for the three months ended June 30, 2008 and 2007, respectively, and recorded pre-tax restructuring and other costs, net, of $7.5 million and $2.3 million for the nine months ended June 30, 2008 and 2007, respectively. These amounts are not comparable since the timing and scope of the individual actions associated with a restructuring can vary. We discuss these charges in more detail below.

     The following table presents a summary of restructuring and other charges, net, related to our active restructuring initiatives that we incurred during the three and nine months ended June 30, 2008 and 2007, the cumulative recorded amount since we announced each initiative, and the total we expect to incur (in millions):

										Severance				Equipment
										and Other				and
						Net Property,				Employee				Inventory				Facility
						Plant and				Related				Relocation				Carrying				Other
Segment		Period				Equipment(a)				Costs				Costs				Costs				Costs				Total
Consumer Packaging(b)		Current Qtr.				$	(0.8	)		$	0.1			$	0.4			$	0.2			$	—			$	(0.1	)
		YTD Fiscal 2008					(0.2	)			1.3				0.6				0.4				0.1				2.2
		Prior Year Qtr.					0.4				—				0.1				0.1				—				0.6
		YTD Fiscal 2007					0.6				0.9				0.3				0.3				0.2				2.3
		Cumulative					5.1				4.1				2.2				1.0				4.4				16.8
		Expected Total					5.1				4.1				2.2				1.2				4.5				17.1
Paperboard		Current Qtr.					—				—				—				—				—				—
		YTD Fiscal 2008					(0.3	)			—				—				—				—				(0.3	)
		Prior Year Qtr.					—				—				—				—				—				—
		YTD Fiscal 2007					—				—				—				—				—				—
		Cumulative					(0.2	)			0.2				0.1				0.4				(0.1	)			0.4
		Expected Total					(0.2	)			0.2				0.1				0.4				(0.1	)			0.4
Other(c)		Current Qtr.					—				—				—				—				3.8				3.8
		YTD Fiscal 2008					—				—				—				—				5.6				5.6
		Prior Year Qtr.					—				—				—				—				—				—
		YTD Fiscal 2007					—				—				—				—				—				—
		Cumulative					—				—				—				—				5.6				5.6
		Expected Total					—				—				—				—				11.3				11.3

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

										Severance				Equipment
										and Other				and
						Net Property,				Employee				Inventory				Facility
						Plant and				Related				Relocation				Carrying				Other
Segment		Period				Equipment(a)				Costs				Costs				Costs				Costs				Total
Total		Current Qtr.				$	(0.8	)		$	0.1			$	0.4			$	0.2			$	3.8			$	3.7
		YTD Fiscal 2008				$	(0.5	)		$	1.3			$	0.6			$	0.4			$	5.7			$	7.5
		Prior Year Qtr.				$	0.4			$	—			$	0.1			$	0.1			$	—			$	0.6
		YTD Fiscal 2007				$	0.6			$	0.9			$	0.3			$	0.3			$	0.2			$	2.3
		Cumulative				$	4.9			$	4.3			$	2.3			$	1.4			$	9.9			$	22.8
		Expected Total				$	4.9			$	4.3			$	2.3			$	1.6			$	15.7			$	28.8

     The following table represents a summary of the restructuring accrual, which is primarily composed of accrued severance and other employee costs, and a reconciliation of the restructuring accrual to the line item “Restructuring and other costs, net” on our condensed consolidated statements of income for the nine months ended June 30, 2008 and 2007 (in millions):

		2008				2007
Accrual at beginning of fiscal year		$	2.4			$	2.1
Additional accruals			1.6				1.1
Payments			(1.4	)			(1.1	)
Adjustments to accrual			—				(0.1	)
Accrual at June 30,		$	2.6			$	2.0
Reconciliation of accruals and charges to restructuring and other costs, net:
Additional accruals and adjustments to accruals (see table above)		$	1.6			$	1.0
Deferred compensation expense			2.8				—
Integration expenses			2.3				—
Net property, plant and equipment			(0.5	)			0.6
Severance and other employee costs			0.3				—
Equipment relocation			0.6				0.3
Facility carrying costs			0.4				0.3
Other			—				0.1
Total restructuring and other costs, net		$	7.5			$	2.3

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Note 7. Tax Provision

     We recorded income tax expense of $9.3 million in the third quarter of fiscal 2008 compared to $14.4 million in the third quarter of last year. The third quarter of fiscal 2008 and 2007 effective rate was approximately 33.1% and 36.4%, respectively. The decrease in the effective rate for the third quarter of fiscal 2008 was primarily due to a tax benefit of $1.1 million recorded in the third quarter of fiscal 2008 related to estimates used in the computation of tax expense recorded for fiscal 2007 versus tax expense based on our fiscal 2007 federal and state tax returns which were prepared in the third quarter of fiscal 2008.

     Income tax expense was $27.7 million for the nine months ended June 30, 2008 compared to $33.7 million in the same period last year. The effective rate for the nine months ended June 30, 2008 was approximately 34.2%, which was primarily due to the inclusion of a tax benefit of $1.1 million related to a tax rate reduction in Canada in the first quarter of fiscal 2008 and the tax benefit in the third quarter of fiscal 2008 discussed above. Our effective tax rate for the nine months ended June 30, 2007 was approximately 35.2%, which included a net tax benefit of $1.4 million recorded in the first quarter of fiscal 2007 primarily due research and development credits arising from the resolution of a review by the Canadian taxing authority, the extension of the federal research and development tax credits by the U.S. Government, and changes in estimates. We expect our marginal effective income tax rate to be approximately 37%.

     In July 2006, the FASB issued FIN 48 which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its consolidated financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). We adopted the provisions of FIN 48 on October 1, 2007.

     As a result of our adoption of FIN 48, we recorded an increase in the liability for unrecognized tax benefits of approximately $1.8 million. This increase was recorded as a reduction to the October 1, 2007 balance of retained earnings. As of October 1, 2007, the gross amount of unrecognized tax benefits was approximately $9.6 million, exclusive of interest and penalties. Of this balance, if we were to prevail on all unrecognized tax benefits recorded, approximately $4.3 million of the $9.6 million reserve would benefit the effective tax rate. We regularly evaluate, assess and adjust the related liabilities in light of changing facts and circumstances, which could cause the effective tax rate to fluctuate from period to period.

     We recognize interest and penalties related to unrecognized tax benefits in income tax expense in the consolidated statements of income, which is consistent with the recognition of these items in prior reporting periods. As of October 1, 2007, we had a recorded liability of $1.3 million for the payment of interest and penalties related to the FIN 48 liability for unrecognized tax benefits.

     We file federal, state and local income tax returns in the U.S. and various foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to fiscal 2001.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Note 8. Inventories

     We value substantially all of our U.S. inventories at the lower of cost or market, with cost determined on the last-in first-out (“LIFO”) inventory valuation method, which we believe generally results in a better matching of current costs and revenues than under the first-in first-out (“FIFO”) inventory valuation method. In periods of increasing costs, the LIFO method generally results in higher cost of goods sold than under the FIFO method. In periods of decreasing costs, the results are generally the opposite. Because LIFO is designed for annual determinations, it is possible to make an actual valuation of inventory under the LIFO method only at the end of each fiscal year based on the inventory levels and costs at that time. Accordingly, we base interim LIFO estimates on management’s projection of expected year-end inventory levels and costs. We value all other inventories at the lower of cost or market, with cost determined using methods which approximate cost computed on a FIFO basis. These other inventories represent primarily foreign inventories and spare parts inventories. Inventories were as follows (in millions):

		June 30,				September 30,
		2008				2007
Finished goods and work in process		$	163.7			$	152.1
Raw materials			108.7				71.9
Supplies and spare parts			47.4				34.3
Inventories at FIFO cost			319.8				258.3
LIFO reserve			(40.8	)			(33.9	)
Net inventories		$	279.0			$	224.4

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Note 9. Debt

     The following were individual components of debt (in millions):

		June 30,				September 30,
		2008				2007
Face value of 5.625% notes due March 2013, net of unamortized discount of $0.1 and $0.1		$	99.9			$	99.9
Hedge adjustments resulting from terminated interest rate derivatives or swaps			1.6				1.8
			101.5				101.7
Face value of 8.20% notes due August 2011, net of unamortized discount of $0.2 and $0.3			249.8				249.7
Hedge adjustments resulting from terminated interest rate derivatives or swaps			5.5				6.7
			255.3				256.4
Face value of 9.25% notes due March 2016, net of unamortized discount of $1.3 (a)			198.7				—
Term loan facilities, net of unamortized discount of $1.9(b)			747.6				160.7
Revolving credit and swing facilities (b)			74.4				68.3
Receivables-backed financing facility (c)			110.0				100.0
Cash payable to sellers (d)			113.1				—
Industrial development revenue bonds bearing interest at: variable rates — $32.8 million at 3.68% at June 30, 2008, and $23.9 million at 4.94% at September 30, 2007; fixed rates — $120.9 million at 6.97% at June 30, 2008 and $0 outstanding at September 30, 2007; all due through October 2036(e)			153.7				23.9
Other notes			10.8				11.3
Total Debt			1,765.1				722.3
Less current portion of debt			247.2				46.0
Long-term debt due after one year		$	1,517.9			$	676.3
The following were the aggregate components of debt (in millions):
Face value of debt instruments, net of unamortized discounts		$	1,758.0			$	713.8
Hedge adjustments resulting from terminated interest rate derivatives or swaps			7.1				8.5
Total Debt		$	1,765.1			$	722.3

     A portion of the debt classified as long-term, which includes the revolving and swing facilities, may be paid down earlier than scheduled at our discretion without penalty. Included in the current portion of debt at June 30, 2008 and September 30, 2007 is an amount of $15.0 million to reflect amounts required to support normal working capital needs.

     For a discussion of certain of our debt characteristics, see “Note 10. Debt” of the Notes to Consolidated Financial Statements section of the Fiscal 2007 Form 10-K. Other than the items noted below, there have been no significant developments.

(a)

On March 5, 2008, we issued $200.0 million aggregate principal amount of 9.25% senior notes due March 2016 in an unregistered offering pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). The unsecured notes were issued pursuant to an indenture, dated as of March 5, 2008 (the “Indenture”), by and among RockTenn, the guarantors listed therein (comprising most of our subsidiaries which are guarantors under the Credit Facility (as defined below)) and HSBC Bank USA, National Association, as Trustee. The Indenture does not limit the aggregate principal amount of notes that we may issue and it provides for the issuance from time to time of additional notes to be issued

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

by us in one or more series as provided in the Indenture, subject to compliance with certain conditions therein. The Indenture contains financial and restrictive covenants, including limitations on: restricted payments, dividend and other payments affecting restricted subsidiaries (as defined therein), incurrence of debt, asset sales, transactions with affiliates, liens, sale and leaseback transactions and the creation of unrestricted subsidiaries. Interest on our 9.25% notes due 2016 is payable in arrears on March 15 and September 15 of each year, commencing on September 15, 2008.

(b)

On March 5, 2008, we entered into an Amended and Restated Credit Agreement (the “Credit Facility”) which replaced our June 6, 2005 Senior Credit Facility. The Credit Facility includes revolving credit, swing, term loan, and letters of credit facilities with an aggregate original maximum principal amount of $1.2 billion consisting of a $450 million revolving credit facility, a $550 million term loan A facility and a $200 million term loan B facility. As scheduled term loan payments or other prepayments are made, the facility size is reduced by those notional amounts. As of June 30, 2008, the term loan B facility was reduced to $199.5 million based on required amortization payments. The term loan A facility has not been reduced. The Credit Facility provides for up to $100.0 million in Canadian or U.S. dollar loans to a Canadian subsidiary. At June 30, 2008, there were $29.1 million in borrowings by the Canadian subsidiary, predominantly denominated in Canadian dollars and $45.3 million denominated primarily in U.S. LIBOR Loans (as defined below) under the revolving credit facility. At June 30, 2008, we had issued aggregate outstanding letters of credit under this facility of approximately $35.3 million, none of which had been drawn upon. Our available borrowings under the revolving credit portion of the Credit Facility are reduced by outstanding letters of credit. Accordingly, at June 30, 2008, we would have been able to borrow an incremental $340.3 million, which excludes the $35.3 million of outstanding letters of credit not drawn on. The revolving credit facility and term loan A facility are scheduled to mature on the earlier to occur of (a) March 5, 2013 or (b) if our $100 million 5.625% senior notes due March 2013 (the “2013 Senior Notes”) have not been paid in full or refinanced by September 15, 2012, then September 15, 2012; the term loan B facility is scheduled to mature on the earlier to occur of (a) March 5, 2014 or (b) if the 2013 Senior Notes have not been paid in full or refinanced by September 15, 2012, then September 15, 2012. At our option, borrowings under the Credit Facility (other than swingline and Canadian dollar loans) bear interest at either (1) LIBOR plus an applicable margin (“LIBOR Loans”) or (2) the base rate, which will be the higher of the prime commercial lending rate of the U.S. Administrative Agent plus an applicable margin or the Federal Funds Rate for Federal Reserve System overnight borrowing transactions plus an applicable margin (“Base Rate Loans”). The Credit Facility is pre-payable at any time. The following table summarizes the applicable margins and percentages related to the revolving credit facility and term loan A of the Credit Facility:

		Range				June 30, 2008
Applicable margin/percentage for determining:
Base Rate Loans interest rate (1)			0.25%-1.50	%			1.50	%
Banker’s Acceptance and LIBOR Loans interest rate (1)			1.25%-2.50	%			2.50	%
Facility commitment fee (2)			0.175%-0.40	%			0.40	%

			The applicable margin for determining the interest rate of the term loan B is fixed at 1.75% per annum in the case of Base Rate Loans and 2.75% for LIBOR Loans. If we select LIBOR Loans for the term B facility, we have agreed to pay term loan B lenders a minimum LIBOR rate of 3.00% plus the applicable margin then in effect.
			Our obligations under the Credit Facility and under certain hedging agreements entered into between any lender or affiliate thereof and any U.S. Credit Party, as defined in the Credit Facility documentation, are unconditionally guaranteed by each of our present U.S. subsidiaries, other than (1) the following unrestricted subsidiaries: Dominion Paperboard Products Ltd., GraphCorr LLC, Rock-Tenn Financial, Inc., RTS Embalajes de Argentina, RTS Embalajes De Chile Limitada, RTS Empaques, S.De R.L. CV, RTS Packaging Foreign Holdings, LLC, RTS Packaging, LLC, Schiffenhaus California, LLC, Schiffenhaus Canada Inc., and (2) Solvay Paperboard LLC, a subsidiary of Southern Container (unless any subsequent refinancing of certain Solvay Paperboard LLC bonds permits such guarantee, in which case Solvay Paperboard LLC will become a guarantor), and (3) partially by our present Canadian subsidiaries. Future subsidiaries will be required to guarantee the obligations under the Credit Facility unless we designate

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

			them as “unrestricted subsidiaries”. Obligations under the Credit Facility are secured by a first priority security interest in a substantial portion of our assets, including the capital stock or other equity interests and indebtedness of certain of our U.S. subsidiaries, certain of the stock of our first tier Canadian subsidiary and certain of our and our subsidiaries’ real and personal property.
			The Credit Facility includes usual and customary affirmative and negative covenants, including maintenance of financial ratios and restrictions on the creation of additional long-term and short-term debt, the creation or existence of certain liens, the occurrence of certain mergers, acquisitions or disposals of assets and certain leasing arrangements, the occurrence of certain fundamental changes in the primary nature of our consolidated business, the nature of certain investments, and other matters. Financial covenants include maintenance of a maximum Leverage Ratio of 5.00 to 1.00 (which decreases to 3.50 to 1.00 over the term of the loans), a minimum Consolidated Interest Coverage Ratio of 2.70 to 1.00 (which increases to 3.50 to 1.00 over the term of the loans), and a minimum Consolidated Net Worth of not less than the sum of $525.0 million plus 50% of cumulative Consolidated Net Income (in each case as defined in the Credit Facility documentation). We are permitted under our Credit Facility to repurchase our capital stock and pay cash dividends. If on a pro forma basis our Leverage Ratio does not exceed 3.00 to 1.00, no default or event of default exists under the Credit Facility and we are able to incur an additional $1.00 of funded debt under the debt and financial covenants in the Credit Facility documentation, we are permitted to make stock repurchases and dividend declarations in the aggregate amount up to 50% of cumulative Consolidated Net Income from April 1, 2008 through the last day of the most recent fiscal quarter end for which financial statements have been delivered. If on a pro forma basis our Leverage Ratio is greater than 3.00 to 1.00, no default or event of default exists under the Credit Facility and we are able to incur an additional $1.00 of funded debt under the debt and financial covenants in the Credit Facility documentation, the aggregate amount of stock repurchases and dividend declarations shall not exceed $30.0 million per year.

(c)

On November 16, 2007, we amended the 364-day receivables-backed financing facility (“Receivables Facility”) to increase the size of the facility from $100.0 million to $110.0 million and to set it to expire on November 15, 2008. Accordingly, such borrowings are classified as current at June 30, 2008 and non-current at September 30, 2007. Borrowing availability under this facility is based on the eligible underlying receivables. At June 30, 2008 and September 30, 2007, maximum available borrowings under this facility were approximately $110.0 million and $100.0 million, respectively. The borrowing rate, which consists of the market rate for asset-backed commercial paper plus a utilization fee, was 2.93% and 5.49% as of June 30, 2008 and September 30, 2007, respectively. In April 2008, our board of directors approved the increase of our Receivables Facility from $110.0 million up to $200.0 million. In the fourth quarter of fiscal 2008, we expect to increase the facility size to an amount between $110 and $200 million to take advantage of the growth in our receivables subsequent to the Southern Container Acquisition.

	(d)		Cash payable to sellers is for the repayment of cash held to support the Solvay industrial development revenue bonds (“Solvay IDBs”) and reimbursements to the sellers for taxes related to the Code section 338(h) (10) election. These items are due in November 2008 and are classified as current.
	(e)		The industrial development revenue bonds are issued by various municipalities in which we maintain facilities. Each series of bonds is secured by a direct pay letter of credit, or collateralized by a mortgage interest and collateral interest in specific property or a combination thereof. As of June 30, 2008, the outstanding amount of direct pay letters of credit supporting all industrial development revenue bonds was $33.1 million, including $11.4 million related to the Solvay IDBs. The letters of credit are renewable at our request so long as no default or event of default has occurred under the Credit Facility. A remarketing agent offers the variable rate bonds for initial sale and uses its best efforts to remarket the bonds until they are repaid. The remarketing agent also periodically determines the interest rates on the variable rate bonds based on prevailing market conditions. Our variable rate industrial development revenue bonds are remarketed on a periodic basis upon demand of the bondholders. If the remarketing agent is unable to successfully remarket the variable rate bonds, the remarketing agent will repurchase the bonds by drawing on the letters of credit. If this were to occur, the issuing lender would immediately be reimbursed with the proceeds of a revolving loan obtained under the Credit Facility. Accordingly, we have classified the industrial development revenue bonds as non-current, except for $2.5 million classified as current at September 30, 2007 because we expected to redeem the bonds during fiscal 2008. They were redeemed in the first quarter of fiscal 2008. On March 5, 2008, we assumed Solvay IDBs totaling $132.3 million in connection with the Southern Container Acquisition. The Solvay IDBs comprise two different series: the 1998 Series (which has $19.7 million maturing in 2014 and $101.2 million maturing in 2030) and the 2000

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Series (which matures in 2011). The remaining principal balance of the 1998 Series bonds and the 2000 Series bonds are $120.9 million and $11.4 million, respectively, at June 30, 2008. Both series are subject to annual sinking fund payments. The next annual sinking fund payments are $2.3 million and $3.8 million for the 1998 Series and 2000 Series, respectively. The 1998 series annual sinking fund payment increases nominally each year until maturity. The 1998 Series has fixed semi-annual interest rates that average 6.97% and the 2000 Series had a variable interest rate of 2.70% in the quarter ended June 30, 2008. The Solvay IDBs can be redeemed at 102% of par beginning in November 2008. The Solvay IDBs also have extensive affirmative, negative and restricted payment covenants which require certain minimum working capital and cash flow requirements, and limit our ability to utilize the restricted cash governed by the indentures. The Solvay IDBs are secured by a payment of debt service to the municipality by us. Each series of bonds may also be secured by a combination of direct pay letters of credit and collateralized by a mortgage interest in land, building and other assets comprising the mill facility, and a collateral interest in specific property, including equipment, accounts receivable, inventory and other personal property.

     Interest on our 8.20% notes due August 2011 is payable in arrears each February and August. Interest on our 5.625% notes due March 2013 is payable in arrears each September and March. Interest on our 9.25% notes due March 2016 is payable in arrears each September and March. The 2011 notes and 2013 Senior Notes now share, on a pro-rata basis, certain of the same collateral that was provided to the Credit Facility lenders (i.e., any principal property of RockTenn or any subsidiaries, or any shares of capital stock or other equity interests or indebtedness of any subsidiaries). The 2016 notes are unsecured. The August 2011, March 2013 and March 2016 notes are redeemable prior to maturity subject to certain rules and restrictions and are not subject to any sinking fund requirements. The indentures related to these notes restrict us and our subsidiaries from incurring certain liens and entering into certain sale and leaseback transactions, subject to a number of exceptions.

     As of June 30, 2008, the aggregate maturities of debt for the remaining fiscal year and succeeding five fiscal years are as follows (in millions):

2008		$	22.2
2009			244.9
2010			32.7
2011			290.3
2012			66.6
2013			588.9
Thereafter			515.9
Unamortized hedge adjustments from terminated interest rate derivatives or swaps			7.1
Unamortized bond discount			(3.5	)
Total long-term debt		$	1,765.1

Interest Rate Swaps

     We are exposed to changes in interest rates as a result of our debt. We use interest rate swap instruments from time to time to manage the interest rate characteristics of portions of our outstanding debt. Periodically we may terminate or sell our interest rate swaps. Upon termination or sale of interest rate swaps designated as cash flow hedges, any amounts received (or paid) are generally not immediately recognized as income but remain in “Other Comprehensive Income/(Loss)” and are amortized to earnings, as interest income (or expense), over the remaining term of the originally hedged item. The cash received (or paid) as a result of terminating the hedges is classified, in the statement of cash flows, in the same category as the cash flows relating to the items being hedged. At September 30, 2007, we had interest rate swap agreements in place with an aggregate notional amount of $200.0 million. We previously designated those swaps as cash flow hedges of the interest rate exposure on an equivalent amount of our floating rate debt. In October 2007, we paid $3.5 million to terminate all of our then open interest rate swaps. On January 31, 2008, we entered into two forward starting floating-to-fixed interest rate swaps with an initial notional amount aggregating $550.0 million with a commencement date of April 1, 2008. These swaps were tiered and the notional amounts were scheduled to decline through April 2012. These swaps were based on the one-month LIBOR rate, and the fixed rates averaged 3.11%, plus the applicable credit margin then in effect. We designated these swaps as cash flow hedges of the interest rate exposure on an equivalent amount of certain floating rate debt we incurred to finance the Southern Container Acquisition. In June 2008, we terminated these interest rate swaps and received proceeds of $10.4 million and entered into two forward starting floating-to-fixed interest rate swaps with an initial notional amount aggregating $550.0 million with a commencement date of July 1, 2008. These swaps are tiered and the notional amounts will decline through April 2012. These swaps are based on the one-month LIBOR rate, and the fixed rates average 4.00%,

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

plus the applicable credit margin then in effect. We have designated these swaps as cash flow hedges of the interest rate exposure on an equivalent amount of certain floating rate debt we incurred to finance the Southern Container Acquisition.

Note 10. Retirement Plans

     We have five qualified defined benefit pension plans. In addition, under several labor contracts, we make payments based on hours worked into multi-employer pension plan trusts established for the benefit of certain collective bargaining employees in facilities both inside and outside the United States. We have a Supplemental Executive Retirement Plan that provides unfunded supplemental retirement benefits to certain of our executives. The following table represents a summary of the components of net pension cost (in millions):

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Service cost		$	2.3			$	2.3			$	6.9			$	6.9
Interest cost			5.3				4.9				16.0				14.8
Expected return on plan assets			(6.9	)			(6.0	)			(20.5	)			(17.4	)
Amortization of prior service cost			0.2				0.3				0.3				0.3
Amortization of net actuarial loss			0.8				1.3				2.4				4.4
Company defined benefit plan expense			1.7				2.8				5.1				9.0
Multi-employer plans for collective bargaining employees			0.6				0.2				1.0				0.5
Net pension cost		$	2.3			$	3.0			$	6.1			$	9.5

     During the three and nine months ended June 30, 2008, we contributed an aggregate of $4.1 million and $15.7 million, respectively, to our five defined benefit pension plans (“U.S. Qualified Plans”). Based on our current assumptions, we anticipate contributing the projected required minimum funding of approximately $16 million and approximately $20 to $22 million in fiscal 2008 and 2009, respectively, to the U.S. Qualified Plans. However, it is possible that our assumptions may change, actual market performance may vary or we may decide to contribute greater amounts. During the three and nine months ended June 30, 2007, we contributed an aggregate of $16.1 million and $20.7 million, respectively, to our U.S. Qualified Plans.

Note 11. Shareholders’ Equity

Stock Options

     The table below summarizes the changes in all stock options during the nine months ended June 30, 2008:

										Weighted
						Weighted				Average				Aggregate
						Average				Remaining				Intrinsic
						Exercise				Contractual				Value
		Shares				Price				Term				(in millions)
Outstanding at September 30, 2007			1,214,962			$	18.70
Granted			307,734				29.10
Exercised			(136,400	)			13.04
Expired			(3,800	)			18.75
Forfeited			(10,600	)			31.43
Outstanding at June 30, 2008			1,371,896			$	21.49			6.9 years				$	13.2
Exercisable at June 30, 2008			881,800			$	16.17			5.6 years				$	12.7

     Our results of operations include compensation expense for stock options for the three months ended June 30, 2008 and 2007 of $0.5 million and $0.5 million, respectively (net of approximately $0.3 million and $0.2 million, respectively, of income taxes); and for the nine months ended June 30, 2008 and 2007 include $1.2 million and $0.7 million, respectively (net of approximately $0.7 million and $0.3 million, respectively, of income taxes). The aggregate intrinsic value of options exercised during the three months ended June 30, 2008 and 2007 was $1.5 million and $0.5 million, respectively, and during the nine months ended June 30, 2008 and 2007 it was $2.8 million and $33.5 million, respectively.

     During the second quarter of fiscal 2008, we granted to certain employees options to purchase 307,734 shares of stock. These options vest over three years. These grants were valued using the Black-Scholes option pricing model. The significant assumptions used were: an expected term of 5.02 years, an expected volatility of 37.82%, expected dividends of 1.48% and a risk free rate of 2.36%. We amortize these costs using the accelerated attribution method.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

As of June 30, 2008, there was $3.3 million of total unrecognized compensation cost related to nonvested stock options that is expected to be recognized over a weighted average remaining vesting period of approximately 1.6 years.

Restricted Stock

     The majority of the fiscal 2008 and fiscal 2007 restricted stock grants may be increased to 150% of the target or decreased to zero, subject to the level of performance attained. The awards are reflected in the table below at the target award amount of 100%. The table summarizes the changes in unvested restricted stock awards during the nine months ended June 30, 2008:

						Weighted
						Average
						Grant Date Fair
		Shares				Value
Unvested at September 30, 2007			852,496			$	18.99
Granted			254,625				30.64
Vested			(134,296	)			15.29
Forfeited			(7,850	)			32.72
Unvested at June 30, 2008			964,975			$	22.47

     Our results of operations for the three and nine months ended June 30, 2008 includes $2.1 million and $4.9 million, respectively, of compensation expense for restricted stock; and for the three and nine months ended June 30, 2007 includes $1.1 million and $4.2 million, respectively, of compensation expense for restricted stock including the acceleration of expense discussed below. The awards granted in fiscal 2004 and 2005 are subject to earlier vesting in one third increments on the first, second and third anniversary of the grant date upon satisfaction of certain earnings improvement criteria specific to each award. The measurement date for early vesting of all of these awards is March 31 of the respective year. In the first quarter of fiscal 2007, we accelerated recognition of compensation expense as we determined it was probable that the latter two-thirds of the fiscal 2004 awards and the first two-thirds of the fiscal 2005 awards would satisfy the early vesting provisions on March 31, 2007, and that the last third of the fiscal 2005 award would satisfy the early vesting provisions on March 31, 2008.

     During the nine months ended June 30, 2008, 134,296 shares of restricted stock vested. In the second quarter of fiscal 2008, 18,000 non-employee director awards granted in fiscal 2007 vested. In the second quarter of fiscal 2008, the last third of the fiscal 2005 awards met the early vesting provisions and 65,165 shares vested. In the third quarter of fiscal 2008, 35,831 employee awards granted in fiscal 2003 vested and 15,300 shares of the fiscal 2006 awards were accelerated.

     During the second quarter of fiscal 2008, 25,000 shares of restricted stock, which vest over one year, were granted to our non-employee directors and target awards of 229,625 shares of restricted stock were granted to certain employees pursuant to our 2004 Incentive Stock Plan, as amended. The second quarter fiscal 2008 employee grants consisted of:

	•		A target award of 129,075 shares that contains a performance condition based on the level of our Debt to EBITDA Ratio (as defined in the applicable grant letter). Certain percentages of the target award will be issued as of the end of the first 12-month period upon the attainment of certain Debt to EBITDA Ratios. Subject to the level of performance attained, the target award may be increased to 150% of the target or decreased to zero.
	•		A target award of 46,825 shares that contains a performance condition based on the annual average return over capital costs (“ROCC”). The target award will be adjusted based on our ROCC performance for the 36 months ended December 31, 2010 compared to the ROCC performance of our Peer Group (as defined in the applicable grant letter). Subject to the level of performance attained, the target award may be increased to 150% of the target or decreased to zero.
	•		A target award of 46,825 shares that contains a market condition based on the percentage return on common stock purchased on January 2, 2008 and held through December 31, 2010, including reinvestment of all dividends paid thereon during that period (the “Total Shareholder Return Grant”). The target award will be adjusted based on our Total Shareholder Return Grant for the 36 months ended December 31, 2010 compared to the total shareholder return performance of our Peer

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Group (as defined). Subject to the level of performance attained, the target award may be increased to 150% of the target or decreased to zero.

•

A target award of 6,900 shares that contains a performance condition based on the operating income of one of our segments. The target award may be adjusted based on the attainment of certain operating income levels during the 12 months ended December 31, 2008. Subject to the level of performance obtained, the target award may be increased to 125% of the target or decreased to zero.

     The first three target awards, as described above, will vest at the percentage of target achieved upon completion of service to March 19, 2011, unless forfeited before that date. The last target award, as described above, will vest at the percentage of target achieved upon completion of service to March 19, 2009, unless forfeited before that date. Expense is recognized on the shares granted with a performance condition and service condition on a straight-line basis over the explicit service period because we estimate that it is probable the performance condition will be satisfied. Expense is recognized on the shares granted with a market condition and service condition on a straight-line basis over the requisite service period which is based on the explicit service period. The restricted stock grants with a market condition were valued using a Monte Carlo simulation at $38.85 per share. The significant assumptions used in valuing these grants were: an expected volatility of 42.3%, expected dividends of 1.4%, and a risk free rate of 1.68%. We estimated the expected forfeiture rate to be 4.7%.

     There was approximately $16.1 million of total unrecognized compensation cost related to all unvested restricted shares as of June 30, 2008 that will be recognized over a weighted average remaining vesting period of 2.0 years.

Note 12. Commitments and Contingencies

Environmental and Other Matters

     We are subject to various federal, state, local and foreign environmental laws and regulations, including, among others, CERCLA, the Clean Air Act (as amended in 1990), the Clean Water Act, the Resource Conservation and Recovery Act and the Toxic Substances Control Act. These environmental regulatory programs are primarily administered by the US Environmental Protection Agency. In addition, some states in which we operate have adopted equivalent or more stringent environmental laws and regulations or have enacted their own parallel environmental programs, which are enforced through various state administrative agencies.

     We believe that future compliance with these environmental laws and regulations will not have a material adverse effect on our results of operations, financial condition or cash flows. However, our compliance and remediation costs could increase materially. In addition, we cannot currently assess with certainty the impact that the future emissions standards and enforcement practices associated with changes to regulations promulgated under the Clean Air Act will have on our operations or capital expenditure requirements. However, we believe that any impact or capital expenditures will not have a material adverse effect on our results of operations, financial condition or cash flows.

     We have been identified as a potentially responsible party (“PRP”) at ten active “superfund” sites pursuant to Superfund legislation. Based upon currently available information and the opinions of our environmental compliance managers and general counsel, although there can be no assurance, we have reached the following conclusions with respect to these ten sites:

	•		With respect to one site, while we have been identified as a PRP, our records reflect no evidence that we are associated with the site. Accordingly, if we are considered to be a PRP, we believe that we should be categorized as an unproven PRP.
	•		With respect to each of nine sites, we preliminarily determined that, while we may be associated with the site and while it is probable that we have incurred a liability with respect to the site, one of the following conclusions was applicable:

•

With respect to each of six sites, we determined while it was not estimable, the potential liability was reasonably likely to be a de minimis amount and immaterial.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

•

With respect to two sites, we have preliminarily determined the potential liability was best reflected by a range of reasonably possible liabilities, all of which we expect to be de minimis and immaterial.

•

With respect to one site, we have preliminarily determined that it is probable that we have incurred a liability with respect to this site. The status of the site is unknown, pending further investigation.

     In addition to the above mentioned sites, four of our current or former locations are being investigated under various state regulations. These investigations may lead to remediation costs; however, we believe any such costs, if any, would be insignificant. Additional information on the four sites follows:

	•		Contamination was discovered at the time of the Gulf States acquisition in June 2005 at two sites we acquired. We did not assume any environmental liabilities as part of the acquisition, but have limited indemnification rights with respect to this contamination. We would expect to assert various defenses under applicable laws with respect to this contamination.
	•		One of these sites is one of our former locations that is involved in an investigation under the state hazardous waste sites program. It is expected that any potential issues will be handled through administrative controls, such as a deed restriction, rather than remediation.

•

It is believed that the contamination discovered at one of the sites was due to an oil release by a previous owner. The previous owner is obligated to indemnify us for any contamination caused by the oil release.

     Except as stated above, we can make no assessment of our potential liability, if any, with respect to any site. Further, there can be no assurance that we will not be required to conduct some remediation in the future at any of these sites and that the remediation will not have a material adverse effect on our results of operations, financial condition or cash flows. We believe that we can assert claims for indemnification pursuant to existing rights we have under settlement and purchase agreements in connection with certain of these sites. There can be no assurance that we will be successful with respect to any claim regarding these indemnification rights or that, if we are successful, any amounts paid pursuant to the indemnification rights will be sufficient to cover all costs and expenses.

     During the first quarter of fiscal 2008 we received approximately $1.7 million in recovery of previously expensed environmental remediation costs from a third party for a site we previously acquired. The recovery reduced the line item “cost of goods sold” on our condensed consolidated statements of income.

Guarantees

     We have made the following guarantees as of June 30, 2008:

	•		We have a 49% ownership interest in Seven Hills. The partners guarantee funding of net losses in proportion to their share of ownership.
	•		As part of the Southern Container Acquisition we have an unconsolidated subsidiary for which we guarantee certain debt in an amount less than $5 million.

•

We lease certain manufacturing and warehousing facilities and equipment under various operating leases. A substantial number of these leases require us to indemnify the lessor in the event that additional taxes are assessed due to a change in the tax law. We are unable to estimate our maximum exposure under these leases because it is dependent on changes in the tax law.

     Over the past several years, we have disposed of assets and/or subsidiaries and have retained liabilities. The related agreements contain representations and warranties relating to matters such as title to assets; accuracy of financial statements; legal proceedings; contracts; employee benefit plans; compliance with environmental laws; patent and trademark infringement; taxes; and products, as well as various covenants. These agreements may also provide specific indemnities for breaches of representations, warranties, or covenants and may contain specific indemnification provisions. These indemnification provisions address potential losses, including, among others, losses related to liabilities other than those assumed by the buyer and liabilities under environmental laws. These indemnification provisions may be affected by various conditions and external factors. Many of the indemnification provisions have expired either by operation of law or by the terms of the agreement. Our specified maximum aggregate potential liability (on an undiscounted basis) is approximately $7.6 million, other than with respect to

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

certain specified liabilities, including liabilities relating to title, taxes, and certain environmental matters, with respect to which there may be no limitation. We estimate the fair value of our aggregate liability for outstanding indemnities, including the indemnities described above with respect to which there are no limitations, to be approximately $0.1 million. Accordingly, we have recorded a liability for that amount.

     During fiscal 1985 through 2002, Kemper Insurance Companies/Lumbermens Mutual provided us with workers’ compensation insurance, auto liability insurance and general liability insurance. Kemper has made public statements that they are uncertain that they will be able to pay all of their claims liabilities in the future. At present, based on public comments made by Kemper, we believe it is reasonably possible they will not be able to pay some or all of the future liabilities associated with our open and reopened claims. However, we cannot reasonably estimate the amount that Kemper may be unable to pay. Additionally, we cannot reasonably estimate the impact of state guarantee funds and any facultative and treaty reinsurance that may be available to pay such liabilities. If Kemper is ultimately unable to pay such liabilities, we believe the range of our liability is between approximately $0 and $2 million, and we are unable to estimate the liability more specifically because of the factors described above. There can be no assurance that any associated liabilities we may ultimately incur will not be material to our results of operations, financial condition or cash flows.

Note Receivable

     We have a note payable to and a note receivable from an obligor who has filed for Chapter 11 bankruptcy protection. We have offset these notes on our condensed consolidated balance sheets for the periods ending June 30, 2008 and September 30, 2007. Based on the terms of the note, we do not believe that it is probable a loss will be incurred. If we ultimately do suffer a loss, we believe the loss could range from $0 to $3 million.

Seven Hills Option

     Seven Hills commenced operations on March 29, 2001. Our partner has the option to put its interest in Seven Hills to us, at a formula price, effective on the sixth or any subsequent anniversary of the commencement date by providing notice to purchase its interest no later than two years prior to the anniversary of the commencement date on which such transaction is to occur. No notification has been received from our partner to date. Therefore, the earliest date at which a put could be completed would be March 29, 2011. We have not recorded any liability for our partner’s right to put its interest in Seven Hills. We currently project this contingent obligation to purchase our partner’s interest (based on the formula) to be approximately $17 million at June 30, 2008, which would result in a purchase price of approximately 62% of our partner’s net equity reflected on Seven Hills’ June 30, 2008 balance sheet.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Note 13. Segment Information

     In the first quarter of fiscal 2008, we changed the name of our Packaging Products segment to Consumer Packaging to more clearly describe the segment and in the second quarter of fiscal 2008, we reorganized our segments to move our St. Paul, MN recycled corrugated medium mill into our Corrugated Packaging segment. The financial statements presented have been reclassified for all periods presented to reflect this reorganization. We have included the results of Southern Container’s operations in our condensed consolidated financial statements since the March 2, 2008 acquisition effective date in our Corrugated Packaging segment.

     The following table shows certain operating data for our segments (in millions). We do not allocate certain of our income and expenses to our segments and, thus, the information that management uses to make operating decisions and assess performance does not reflect such amounts. We report these items as non-allocated expenses or in other line items in the table below after Total segment income.

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Net sales (aggregate):
Consumer Packaging		$	334.7			$	319.0			$	998.0			$	934.9
Paperboard			238.2				227.2				685.7				627.9
Corrugated Packaging			211.0				61.1				387.6				179.8
Merchandising Displays			86.1				76.8				262.4				220.3
Total		$	870.0			$	684.1			$	2,333.7			$	1,962.9
Less net sales (intersegment):
Consumer Packaging		$	2.9			$	1.2			$	8.6			$	3.3
Paperboard			88.3				85.7				250.2				232.6
Corrugated Packaging			7.7				5.8				21.4				16.0
Merchandising Displays			0.1				—				0.3				—
Total		$	99.0			$	92.7			$	280.5			$	251.9
Net sales (unaffiliated customers):
Consumer Packaging		$	331.8			$	317.8			$	989.4			$	931.6
Paperboard			149.9				141.5				435.5				395.3
Corrugated Packaging			203.3				55.3				366.2				163.8
Merchandising Displays			86.0				76.8				262.1				220.3
Total		$	771.0			$	591.4			$	2,053.2			$	1,711.0
Segment income:
Consumer Packaging		$	15.6			$	12.4			$	48.3			$	37.2
Paperboard			19.7				32.3				61.0				75.4
Corrugated Packaging			23.5				3.8				33.0				15.7
Merchandising Displays			8.4				10.8				30.1				28.1
Total segment income			67.2				59.3				172.4				156.4
Restructuring and other costs, net			(3.7	)			(0.6	)			(7.5	)			(2.3	)
Non-allocated expenses			(6.9	)			(5.2	)			(19.8	)			(16.4	)
Interest expense			(27.6	)			(11.8	)			(61.0	)			(37.1	)
Interest and other income (expense), net			0.8				(1.3	)			0.8				(1.1	)
Minority interest in income of consolidated subsidiaries			(1.7	)			(0.8	)			(3.8	)			(3.8	)
Income before income taxes			28.1				39.6				81.1				95.7
Income tax expense			(9.3	)			(14.4	)			(27.7	)			(33.7	)
Net income		$	18.8			$	25.2			$	53.4			$	62.0