10Q 6.30.2011
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
Form 10-Q
 
S
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2011
or
 
£
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from              to             
Commission File Number 1-12613
Rock-Tenn Company
(Exact Name of Registrant as Specified in Its Charter)
Georgia
 
62-0342590
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
504 Thrasher Street, Norcross, Georgia
 
30071
(Address of Principal Executive Offices)
 
(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 S  No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes S  No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer S
  
Accelerated filer £
Non-accelerated filer £ (Do not check if smaller reporting company)
  
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 £  No S
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 29, 2011
Class A Common Stock, $0.01 par value
 
71,210,553
 
Table of Contents

ROCK-TENN COMPANY
INDEX
 
 
 
Page
PART I
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
 
 
 
Item 6.
 
 
 
 
Table of Contents

PART I: FINANCIAL INFORMATION

Item 1.
FINANCIAL STATEMENTS (UNAUDITED)

ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Millions, Except Per Share Data)
 
 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
Net sales
$
1,382.1

 
$
771.9

 
$
2,936.1

 
$
2,194.6

Cost of goods sold (net of alternative fuel mixture credit of $0, $0, $0 and $28.8)
1,169.7

 
595.8

 
2,378.6

 
1,678.7

Gross profit
212.4

 
176.1

 
557.5

 
515.9

Selling, general and administrative expenses
145.3

 
84.9

 
316.8

 
252.1

Restructuring and other costs, net
55.5

 
(0.2
)
 
62.4

 
4.1

Operating profit
11.6

 
91.4

 
178.3

 
259.7

Interest expense
(22.8
)
 
(17.8
)
 
(55.7
)
 
(58.5
)
Loss on extinguishment of debt
(39.5
)
 
—

 
(39.5
)
 
(2.8
)
Interest income and other income, net
4.1

 
0.1

 
4.1

 
0.4

Equity in income of unconsolidated entities
0.6

 
0.3

 
1.2

 
0.2

Income (loss) before income taxes
(46.0
)
 
74.0

 
88.4

 
199.0

Income tax benefit (expense)
17.6

 
(27.0
)
 
(27.2
)
 
(60.7
)
Consolidated net income (loss)
(28.4
)
 
47.0

 
61.2

 
138.3

Less: Net income attributable to noncontrolling interests
(1.7
)
 
(1.9
)
 
(4.0
)
 
(4.1
)
Net income (loss) attributable to Rock-Tenn Company shareholders
$
(30.1
)
 
$
45.1

 
$
57.2

 
$
134.2

 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to Rock-Tenn Company shareholders
$
(0.60
)
 
$
1.16

 
$
1.32

 
$
3.45

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share attributable to Rock-Tenn Company shareholders
$
(0.60
)
 
$
1.14

 
$
1.30

 
$
3.39

 
 
 
 
 
 
 
 
Cash dividends paid per share
$
0.20

 
$
0.15

 
$
0.60

 
$
0.45

See Accompanying Notes to Condensed Consolidated Financial Statements

1
Table of Contents

ROCK-TENN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions, Except Share Data) 
 
June 30,
2011
 
September 30,
2010
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
51.6

 
$
15.9

Restricted cash
41.5

 
—

Accounts receivable (net of allowances of $30.8 and $7.8)
1,127.9

 
333.5

Inventories
833.7

 
269.5

Other current assets
231.5

 
90.1

Total current assets
2,286.2

 
709.0

Property, plant and equipment at cost:
 
 
 
Land and buildings
1,163.0

 
420.6

Machinery and equipment
5,681.5

 
1,915.7

Transportation equipment
13.0

 
13.1

Leasehold improvements
5.1

 
5.1

 
6,862.6

 
2,354.5

Less accumulated depreciation and amortization
(1,249.0
)
 
(1,104.5
)
Net property, plant and equipment
5,613.6

 
1,250.0

Goodwill
1,853.0

 
748.8

Intangibles, net
833.1

 
151.5

Other assets
178.5

 
55.6

 
$
10,764.4

 
$
2,914.9

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Current portion of debt
$
241.5

 
$
231.6

Accounts payable
845.9

 
252.3

Accrued compensation and benefits
269.9

 
90.7

Other current liabilities
192.2

 
56.6

Total current liabilities
1,549.5

 
631.2

Long-term debt due after one year
3,241.9

 
897.3

Pension liabilities, net of current portion
1,146.2

 
165.3

Postretirement benefit liabilities, net of current portion
159.0

 
0.8

Deferred income taxes
979.6

 
166.4

Other long-term liabilities
139.2

 
29.2

Commitments and contingencies (Note 15)

 
 
Redeemable noncontrolling interests
7.8

 
7.3

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; 71,206,859 and 38,903,036 shares outstanding at June 30, 2011 and September 30, 2010, respectively
0.7

 
0.4

Capital in excess of par value
2,764.1

 
290.5

Retained earnings
837.5

 
812.6

Accumulated other comprehensive loss
(62.0
)
 
(92.2
)
Total Rock-Tenn Company shareholders’ equity
3,540.3

 
1,011.3

Noncontrolling interests
0.9

 
6.1

Total equity
3,541.2

 
1,017.4

 
$
10,764.4

 
$
2,914.9

See Accompanying Notes to Condensed Consolidated Financial Statements

2
Table of Contents

ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
 
Nine Months Ended
 
June 30,
 
2011
 
2010
Operating activities:
 
 
 
Consolidated net income
$
61.2

 
$
138.3

Adjustments to reconcile consolidated net income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
147.4

 
110.7

Deferred income tax expense
8.8

 
16.2

Share-based compensation expense
16.6

 
11.9

Loss on extinguishment of debt
39.5

 
2.8

(Gain) loss on disposal of plant, equipment and other, net
(0.1
)
 
0.2

Equity in income of unconsolidated entities
(1.2
)
 
(0.2
)
Pension funding less than expense
5.4

 
3.1

Alternative fuel mixture credit benefit
—

 
(29.0
)
Impairment adjustments and other non-cash items
5.9

 
2.6

Change in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
(5.8
)
 
1.2

Inventories
30.6

 
15.6

Other assets
35.7

 
(5.6
)
Accounts payable
18.8

 
(3.7
)
Income taxes
(53.1
)
 
58.0

Accrued liabilities and other
30.0

 
(9.1
)
Net cash provided by operating activities
339.7

 
313.0

Investing activities:
 
 
 
Capital expenditures
(107.5
)
 
(60.9
)
Cash paid for purchase of business, net of cash received
(1,301.5
)
 
—

Investment in unconsolidated entities
(1.3
)
 
(0.2
)
Return of capital from unconsolidated entities
0.6

 
0.6

Proceeds from sale of property, plant and equipment
7.6

 
3.2

Proceeds from property, plant and equipment insurance settlement
0.3

 
—

Net cash used for investing activities
(1,401.8
)
 
(57.3
)
Financing activities:
 
 
 
Additions to revolving credit facilities
363.5

 
189.1

Repayments of revolving credit facilities
(279.5
)
 
(187.3
)
Additions to debt
2,877.0

 
102.3

Repayments of debt
(1,786.1
)
 
(339.1
)
Debt issuance costs
(43.1
)
 
(0.2
)
Cash paid for debt extinguishment costs
(37.9
)
 
—

Issuances of common stock, net of related minimum tax withholdings
24.2

 
(1.9
)
Excess tax benefits from share-based compensation
7.3

 
1.9

Repayments to unconsolidated entity
0.6

 
0.7

Cash dividends paid to shareholders
(23.6
)
 
(17.5
)
Cash distributions paid to noncontrolling interests
(4.2
)
 
(4.4
)
Net cash provided by (used for) financing activities
1,098.2

 
(256.4
)
Effect of exchange rate changes on cash and cash equivalents
(0.4
)
 
0.3

Increase (decrease) in cash and cash equivalents
35.7

 
(0.4
)
Cash and cash equivalents at beginning of period
15.9

 
11.8

Cash and cash equivalents at end of period
$
51.6

 
$
11.4

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid (received) during the period for:
 
 
 
Income taxes, net of refunds
$
19.6

 
$
(15.9
)
Interest, net of amounts capitalized
42.8

 
48.2





3
Table of Contents

Supplemental schedule of non-cash investing and financing activities:

Liabilities assumed, including debt, reflect the May 27, 2011 acquisition of Smurfit-Stone Container Corporation (“Smurfit-Stone” and “Smurfit-Stone Acquisition”) and reflects the preliminary purchase price allocation.

 
Nine Months Ended June 30,
 
2011
 
(In millions)
Fair value of assets acquired, including goodwill
$
7,720.2

Cash paid, net of cash received
1,301.5

Stock issued in acquisition
2,380.7

Fair value of equity awards issued
56.4

     Liabilities assumed
$
3,981.6

 
 
Included in liabilities assumed is the following item:
 
 
 
Debt assumed in acquisition
$
1,180.5


In connection with the Smurfit-Stone Acquisition we acquired the noncontrolling interest in Schiffenhaus Canada, Inc. which was assigned a fair value of $23.3 million. Since we held a controlling interest in this entity prior to the acquisition, the noncontrolling interest balance of $5.3 million was eliminated on the acquisition date with an offsetting charge of $18.0 million to capital in excess of par.

For additional information on the Smurfit-Stone Acquisition and financing see “Note 5. Acquisitions” and “Note 10. Debt”.



See Accompanying Notes to Condensed Consolidated Financial Statements

4
Table of Contents

ROCK-TENN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Month Periods Ended June 30, 2011
(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. Our references to the business of Rock-Tenn Company do not include entities that we do not consolidate. In April 2011, our ownership of QPSI, a business providing merchandising displays, contract packaging, logistics and distribution solutions increased from 23.96% to approximately 31.5% as a result of a liquidation of one of the member’s ownership interest.
RockTenn is one of North America's leading integrated manufacturers of corrugated and consumer packaging and recycling solutions. We primarily manufacturer containerboard, recycled paperboard, bleached paperboard, packaging products and merchandising displays. We also procure fiber and other materials for our paper mills as well as other manufacturers.
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, 2010 from the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010 (the “Fiscal 2010 Form 10-K”). 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, 2011 and June 30, 2010, our financial position at June 30, 2011 and September 30, 2010, and our cash flows for the nine months ended June 30, 2011 and June 30, 2010.
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 Fiscal 2010 Form 10-K.
The results for the three and nine months ended June 30, 2011 are not necessarily indicative of results that may be expected for the full year.
We have made certain reclassifications to prior year amounts to conform such amounts to the current year presentation.
Note 2.
New Accounting Standards
Recently Adopted Standards
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2009-16 “Accounting for Transfers of Financial Assets” which amended certain provisions of ASC 860 “Transfers and Servicing”. These provisions require additional disclosures about the transfer and derecognition of financial assets and eliminate the concept of qualifying special-purpose entities. These provisions were effective for fiscal years beginning after November 15, 2009 (October 1, 2010 for us). The adoption of these provisions did not have a material effect on our consolidated financial statements.
In June 2009, the FASB issued certain provisions of ASC 810 “Consolidation” which revise the approach to determining the primary beneficiary of a variable interest entity to be more qualitative in nature and require companies to more frequently reassess whether they must consolidate a variable interest entity. These provisions were effective for fiscal years beginning after November 15, 2009 (October 1, 2010 for us), for interim periods within the first annual reporting period and for interim and annual reporting periods thereafter. The adoption of these provisions did not have a material effect on our consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update 2009-13 “Multiple Deliverable Revenue Arrangements” which amended certain provisions of ASC 605-25 “Revenue Recognition”. These provisions clarify the separation criteria for deliverables in a multiple element revenue arrangement and require the use of the relative selling price of standalone elements to allocate transaction costs to individual elements at inception. These provisions also require additional disclosures regarding the nature and type of performance obligations of significant multiple deliverable revenue arrangements. These provisions were effective for fiscal periods beginning on or after June 15, 2010 (October 1, 2010 for us). The adoption of these provisions did not have a material effect on our consolidated financial statements.
In December 2010, the FASB issued Accounting Standards Update 2010-29 “Disclosure of Supplementary Pro Forma Information for Business Combinations” which amended certain provisions of ASC 805 Business Combinations. These provisions specify that if an entity presents comparative financial statements, it should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. In addition these provisions expand the supplemental pro forma disclosures under ASC 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported proforma revenue and earnings. These provisions are effective for fiscal periods beginning

5
Table of Contents
Notes to Condensed Consolidated Statements (Unaudited) (Continued)

after December 15, 2010, early adoption is permitted. We adopted these provision in our June 30, 2011 consolidated financial statements.

Recently Issued Standards
In June 2011, the FASB issued Accounting Standards Update 2011-04 “Amendments to Achieve Common Fair Value Measurements and Disclosures in U.S. GAAP and IFRS” which amended certain provisions of ASC 820 “Fair Value Measurement”. These provisions change key principles or requirements for measuring fair value, clarify the FASB's intent regarding application of existing requirements and impact required disclosures. These provisions are effective for interim and annual periods beginning after December 15, 2011 (January 1, 2012 for us). We are currently evaluating the effect of these provisions on our consolidated financial statements.



6
Table of Contents
Notes to Condensed Consolidated Statements (Unaudited) (Continued)


Note 3.
Comprehensive Income (Loss) and Equity
Comprehensive Income (Loss)
The following are the components of comprehensive income (loss), net of tax (in millions):
 
 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
Consolidated net income (loss)
$
(28.4
)
 
$
47.0

 
$
61.2

 
$
138.3

Foreign currency translation gain (loss)
7.0

 
(9.1
)
 
18.8

 
0.9

Net deferred loss on cash flow hedges
(0.1
)
 
(0.9
)
 
(0.3
)
 
(2.7
)
Reclassification adjustment of net loss on cash flow hedges included in earnings
1.0

 
1.4

 
3.2

 
4.6

Amortization of net actuarial loss
3.3

 
2.7

 
9.1

 
9.0

Amortization of prior service cost
0.1

 
0.1

 
0.3

 
0.4

Other comprehensive income adjustments
—

 
—

 
—

 
(1.7
)
Comprehensive income (loss)
(17.1
)
 
41.2

 
92.3

 
148.8

Less: Comprehensive (income) loss attributable to noncontrolling interests
(2.0
)
 
(1.4
)
 
(5.0
)
 
0.2

Comprehensive income (loss) attributable to Rock-Tenn Company shareholders
$
(19.1
)
 
$
39.8

 
$
87.3

 
$
149.0

The net of tax components of comprehensive income were determined using effective tax rates of approximately 39% for the three and nine months ended June 30, 2011 and June 30, 2010. 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.
Equity
The following is a summary of the changes in total equity for the nine months ended June 30, 2011 (in millions):
 
Rock-Tenn
Company
Shareholders’
Equity
 
Noncontrolling
Interests (1)
 
Total
Equity
Balance at September 30, 2010
$
1,011.3

 
$
6.1

 
$
1,017.4

Net income
57.2

 
2.0

 
59.2

Components of other comprehensive income, net of tax:
 
 
 
 
 
Foreign currency translation gain
18.2

 
0.4

 
18.6

Net deferred loss on cash flow hedges
(0.3
)
 
—

 
(0.3
)
Reclassification adjustment of net loss on cash flow hedges derivatives included in earnings
3.2

 
—

 
3.2

Amortization of net actuarial loss
8.8

 
—

 
8.8

Amortization of prior service cost
0.3

 
—

 
0.3

Income tax benefit from share-based plans
5.3

 
—

 
5.3

Fair value of equity issued in acquisition
56.4

 
—

 
56.4

Compensation expense under share-based plans
16.6

 
—

 
16.6

Cash dividends (per share - $0.60)
(23.6
)
 
—

 
(23.6
)
Cash distributions to noncontrolling interests
—

 
(2.3
)
 
(2.3
)
Issuance of Class A common stock, net of stock received for minimum tax withholdings (2)
2,404.9

 
—

 
2,404.9

Purchase of subsidiary shares from noncontrolling interest
(18.0
)
 
(5.3
)
 
(23.3
)
Balance at June 30, 2011
$
3,540.3

 
$
0.9

 
$
3,541.2


7
Table of Contents
Notes to Condensed Consolidated Statements (Unaudited) (Continued)

(1) 
Excludes amounts related to contingently redeemable noncontrolling interests which are separately classified outside of permanent equity in the mezzanine section of the Condensed Consolidated Balance Sheets.
(2)    Included in the Issuance of Class A common stock is $2,380.7 million of common stock in connection with the Smurfit-Stone Acquisition.
Note 4.
Earnings (Loss) per Share
Certain of our restricted stock awards are considered participating securities as they receive non-forfeitable rights to dividends at the same rate as common stock. As participating securities, we include these instruments in the earnings allocation in computing earnings per share (“EPS”) under the two-class method described in ASC 260 “Earnings per Share.” The following table sets forth the computation of basic and diluted earnings (loss) per share under the two-class method (in millions, except per share data):
 
 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income (loss) attributable to Rock-Tenn Company shareholders
$
(30.1
)
 
$
45.1

 
$
57.2

 
$
134.2

Less: Distributed and undistributed income available to participating securities
(0.1
)
 
(0.6
)
 
(0.8
)
 
(1.7
)
Distributed and undistributed income (loss) attributable to Rock-Tenn Company shareholders
$
(30.2
)
 
$
44.5

 
$
56.4

 
$
132.5

Denominator:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
50.7

 
38.5

 
42.7

 
38.4

Basic earnings (loss) per share attributable to Rock-Tenn Company shareholders
$
(0.60
)
 
$
1.16

 
$
1.32

 
$
3.45

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income (loss) attributable to Rock-Tenn Company shareholders
$
(30.1
)
 
$
45.1

 
$
57.2

 
$
134.2

Less: Distributed and undistributed income available to participating securities
(0.1
)
 
(0.6
)
 
(0.7
)
 
(1.7
)
Distributed and undistributed income (loss) attributable to Rock-Tenn Company shareholders
$
(30.2
)
 
$
44.5

 
$
56.5

 
$
132.5

Denominator:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
50.7

 
38.5

 
42.7

 
38.4

Effect of dilutive stock options and non-participating securities
—

 
0.7

 
0.6

 
0.7

Diluted weighted average shares outstanding
50.7

 
39.2

 
43.3

 
39.1

Diluted earnings (loss) per share attributable to Rock-Tenn Company shareholders
$
(0.60
)
 
$
1.14

 
$
1.30

 
$
3.39

Weighted average shares includes 0.7 million of reserved, but unissued shares at June 30, 2011. These reserved shares will be distributed as claims are liquidated or resolved in accordance with the Smurfit-Stone Plan of Reorganization and Confirmation Order.
Due to the net loss in the three months ended June 30, 2011, stock options and and non-participating securities of 0.8 million common shares were not included in computing diluted earnings per share because the effect would have been antidilutive. Options to purchase 0.1 million common shares in the nine months ended June 30, 2011 were not included in computing diluted earnings per share. Options to purchase 0.1 million and 0.1 million common shares were not included in computing diluted earnings per share in the three and nine months ended June 30, 2010, respectively, because the effect would have been antidilutive.
Note 5.
Acquisitions
Smurfit-Stone Acquisition

8
Table of Contents
Notes to Condensed Consolidated Statements (Unaudited) (Continued)

On May 27, 2011, we completed our acquisition of Smurfit-Stone Container Corporation through the merger of Smurfit-Stone with and into a wholly owned limited liability company subsidiary of RockTenn. As a result of the merger, the separate corporate existence of Smurfit-Stone ceased and RockTenn CP, LLC is continuing as the surviving entity of the merger. We have included in our financial statements the results of Smurfit-Stone's containerboard mill and corrugated converting operations in our Corrugated Packaging segment, Smurfit-Stone's recycling operations in our Recycling and Waste Solutions segment and Smurfit-Stone's display operations in our Consumer Packaging segment. We made the Smurfit-Stone Acquisition in order to expand our corrugated packaging business as we believe the containerboard and corrugated packaging industry is a very good business and U.S. virgin containerboard is a strategic global asset. The purchase price for the acquisition was $4,919.1 million, net of cash received of $473.5 million. The purchase price includes $1,301.5 million cash paid net of cash received, $2,380.7 million for the issuance of approximately 31.0 million shares of RockTenn common stock, including approximately 0.7 million shares reserved but unissued at June 30, 2011, we assumed $1,180.5 million of debt and recorded $56.4 million for stock options assumed by RockTenn as discussed in “Note 14. Stock Based Compensation”. The reserved shares will be distributed as claims are liquidated or resolved in accordance with the Smurfit-Stone Plan of Reorganization and Confirmation Order. The shares issued were valued at $76.735 per share which represents the average of the high and low stock price on the acquisition date.

As discussed in "Note 10. Debt" we entered into a new Credit Facility and amended our receivables-backed financing facility at the time of the Smurfit-Stone Acquisition. We recorded a loss on extinguishment of debt of approximately $39.5 million primarily for fees paid to certain creditors and third parties and to write-off certain unamortized deferred financing costs related to the Terminated Credit Facility and capitalized approximately $42.6 million of debt issuance costs in other assets related to the new and amended credit agreements.

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 all assets acquired and liabilities assumed including, among other things, obtaining third-party valuations of certain tangible and intangible assets as well as the fair value of certain contracts and certain tax balances, thus, the allocation of the purchase price is preliminary and subject to material revision.

Opening balance effective May 27, 2011 (in millions):
Current assets, net of cash received
$
1,441.5

Property, plant, and equipment
4,375.6

Goodwill 
1,100.9

Intangible assets
702.0

Other long-term assets
100.2

Total assets acquired
7,720.2

 
 
Current portion of debt
9.4

Current liabilities
825.6

Long-term debt due after one year
1,171.1

Accrued pension and other long-term benefits
1,208.3

Noncontrolling interest and other long-term liabilities
767.2

Total liabilities assumed
3,981.6

 
 
Net assets acquired
$
3,738.6


We recorded preliminary estimated fair values for acquired assets and liabilities including goodwill and intangibles. The preliminary estimated fair value assigned to goodwill is primarily attributable to buyer-specific synergies expected to arise after the acquisition (e.g., enhanced geographic reach of the combined organization, increased vertical integration opportunities and diversification of fiber sourcing) and the assembled work force of Smurfit-Stone. The following table summarizes the weighted average life, gross carrying amount and accumulated amortization relating to intangible assets recognized in the Smurfit-Stone Acquisition, excluding goodwill (in millions):


9
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Notes to Condensed Consolidated Statements (Unaudited) (Continued)

 
 
 
 
June 30, 2011
 
 
Weighted Avg. Life
 
Gross Carrying Amount
 
Accumulated Amortization
Customer relationships
 
10.3

 
$
641.3

 
(6.0
)
Favorable contracts
 
5.3

 
34.0

 
(1.8
)
Technology and patents
 
8.0

 
13.3

 
(0.2
)
Trademarks and tradenames
 
3.5

 
10.4

 
(0.3
)
Non-compete agreements
 
2.0

 
3.0

 
(0.2
)
Total
 
9.9

 
$
702.0

 
(8.5
)

None of the intangibles has significant residual value. The intangibles are expected to be amortized over estimated useful lives ranging from 2 to 18 years on a straight-line basis. As of June 30, 2011, the estimated amortization expense related to intangible assets recognized in the Smurfit-Stone Acquisition for the remainder of fiscal 2011 and the succeeding five fiscal years is as follows (in millions):
    
2011
$
23.1

2012
84.2

2013
73.6

2014
70.3

2015
66.9

2016
66.8


The following unaudited pro forma information reflects our consolidated results of operations as if the acquisition had taken place on October 1, 2009. The unaudited 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. The unaudited pro forma financial information does not reflect the impact of future events that may occur after the acquisition, including, but not limited to, anticipated costs savings from synergies or other operational improvements.
 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
(in millions)
2011
 
2010
 
2011
 
2010
Net sales
$
2,384.2

 
$
2,315.4

 
$
7,111.0

 
$
6,540.9

Net income
$
64.9

 
$
1,454.0

 
$
248.3

 
$
1,238.4


Net income for the three and nine months ended June 30, 2011 is not very comparable as it includes reorganization income from Smurfit-Stone's bankruptcy emergence and a gain on fresh start accounting adjustments which were partially offset by other reorganization charges. Revenues associated with the Smurfit-Stone Acquisition since the date acquired for the three months ended June 30, 2011 were $606.3 million. Disclosure of earnings associated with the Smurfit-Stone Acquisition since the date acquired for the three months ended June 30, 2011 is not practicable as it is not being operated as a standalone business.

The unaudited pro forma financial information presented in the table above has been adjusted to give effect to adjustments that are (1) directly related to the business combination; (2) factually supportable; and (3) expect to have a continuing impact. These adjustments include, but are not limited to, the application of our accounting policies; elimination of related party transactions; depreciation and amortization related to fair value adjustments to property, plant and equipment and intangible assets including contracts assumed; and interest expense on acquisition related debt.

Unaudited pro forma earnings for the three months ended June 30, 2011 were adjusted to exclude $55.4 million of acquisition inventory step-up expense, $97.8 million of employee compensation related items consisting primarily of certain change in control payments and acceleration of stock-based compensation, $42.8 million of acquisition costs which primarily consist of advisory, legal, accounting, valuation and other professional or consulting fees, and $81.5 million of loss on extinguishment of debt. Unaudited pro forma earnings for the nine months ended June 30, 2011 were adjusted to exclude $55.4 million of acquisition inventory step-up expense, $97.8 million of employee compensation related items consisting primarily of certain change in control payments and acceleration of stock-based compensation, $49.2 million of acquisition costs which primarily consist of advisory,

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Notes to Condensed Consolidated Statements (Unaudited) (Continued)

legal, accounting, valuation and other professional or consulting fees, and $81.5 million of loss on extinguishment of debt. The nine months ended June 30, 2010 information has been adjusted to include the impact of the expenses noted above for the nine months ended June 30, 2011in order to present the unaudited pro forma financial information as if the transaction had occurred on October 1, 2009. Included in earnings for the three month and nine months ended June 30, 2011 are $19.9 million and $22.2 million, respectively, of integration costs which primarily consist of severance and other employee costs and professional services.

Note 6.
Alternative Fuel Mixture Credit
We recognized $29.0 million of alternative fuel mixture credit, which was not taxable for federal or state income tax purposes, and reduced cost of goods sold in our Consumer Packaging segment by $28.8 million, net of expenses, in the nine months ended June 30, 2010. For more information regarding our alternative fuel mixture credit and cellulosic biofuel producer credit, see “Note 5. Alternative Fuel Mixture Credit and Cellulosic Biofuel Producer Credit” of the Notes to Consolidated Financial Statements section of the Fiscal 2010 Form 10-K and in Item 2 under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”.
Note 7.
Restructuring and Other Costs, Net
Summary of Restructuring and Other Initiatives
We recorded pre-tax restructuring and other costs, net, of $55.5 million and income of $0.2 million for the three months ended June 30, 2011 and June 30, 2010, respectively, and recorded pre-tax restructuring and other costs, net, of $62.4 million and $4.1 million for the nine months ended June 30, 2011 and June 30, 2010, respectively. These amounts are not comparable since the timing and scope of the individual actions associated with a restructuring, an acquisition or integration can vary. We discuss these charges in more detail below.
The following table presents a summary of restructuring and other charges, net, related to active restructuring and other initiatives that we incurred during the three months and nine months ended June 30, 2011 and June 30, 2010, the cumulative recorded amount since we announced the initiative, and the total we expect to incur (in millions):

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Notes to Condensed Consolidated Statements (Unaudited) (Continued)

Summary of Restructuring and Other Costs, Net
Segment
 
Period
 
Net Property,
Plant and
Equipment (1)
 
Severance
and Other
Employee
Related
Costs
 
Equipment
and Inventory
Relocation
Costs
 
Facility
Carrying
Costs
 
Other
Costs
 
Total    
Corrugated
Packaging(a)
 
Current Qtr.
 
$
2.3

 
$
5.5

 
$
0.1

 
$
0.3

 
$
—

 
$
8.2

YTD Fiscal 2011
 
1.9

 
5.6

 
0.1

 
0.3

 
0.6

 
8.5

Prior Year Qtr.
 
—

 
—

 
—

 
—

 
—

 
—

YTD Fiscal 2010
 
—

 
—

 
—

 
—

 
0.1

 
0.1

 
 
Cumulative
 
6.0

 
6.4

 
0.4

 
0.2

 
1.7

 
14.7

 
 
Expected Total
 
6.0

 
6.4

 
1.9

 
4.8

 
2.7

 
21.8

Consumer Packaging(b)
 
Current Qtr.
 
3.5

 
1.6

 
0.2

 
0.2

 
0.1

 
5.6

YTD Fiscal 2011
 
3.3

 
1.7

 
0.3

 
0.5

 
0.1

 
5.9

Prior Year Qtr.
 
(0.3
)
 
(0.1
)
 
0.1

 
—

 
—

 
(0.3
)
YTD Fiscal 2010
 
2.1

 
1.0

 
0.1

 
0.1

 
0.6

 
3.9

 
 
Cumulative
 
8.6

 
4.2

 
1.0

 
0.7

 
2.2

 
16.7

 
 
Expected Total
 
9.0

 
4.9

 
2.7

 
2.2

 
2.5

 
21.3

Recycling and Waste Solutions(c)
 
Current Qtr.
 
—

 
—

 
—

 
—

 
—

 
—

YTD Fiscal 2011
 
—

 
—

 
—

 
0.1

 
—

 
0.1

Prior Year Qtr.
 
—

 
—

 
—

 
—

 
0.1

 
0.1

YTD Fiscal 2010
 
—

 
—

 
—

 
—

 
0.1

 
0.1

 
 
Cumulative
 
—

 
—

 
—

 
0.3

 
0.1

 
0.4

 
 
Expected Total
 
—

 
—

 
—

 
0.3

 
0.1

 
0.4

Other(d)
 
Current Qtr.
 
—

 
—

 
—

 
—

 
41.7

 
41.7

 
 
YTD Fiscal 2011
 
—

 
—

 
—

 
—

 
47.9

 
47.9

 
 
Prior Year Qtr.
 
—

 
—

 
—

 
—

 
—

 
—

 
 
YTD Fiscal 2010
 
—

 
—

 
—

 
—

 
—

 
—

 
 
Cumulative
 
—

 
—

 
—

 
—

 
64.5

 
64.5

 
 
Expected Total
 
—

 
—

 
—

 
—

 
64.5

 
64.5

Total
 
Current Qtr.
 
$
5.8

 
$
7.1

 
$
0.3

 
$
0.5

 
$
41.8

 
$
55.5

 
 
YTD Fiscal 2011
 
$
5.2

 
$
7.3

 
$
0.4

 
$
0.9

 
$
48.6

 
$
62.4

 
 
Prior Year Qtr.
 
$
(0.3
)
 
$
(0.1
)
 
$
0.1

 
$
—

 
$
0.1

 
$
(0.2
)
 
 
YTD Fiscal 2010
 
$
2.1

 
$
1.0

 
$
0.1

 
$
0.1

 
$
0.8

 
$
4.1

 
 
Cumulative
 
$
14.6

 
$
10.6

 
$
1.4

 
$
1.2

 
$
68.5

 
$
96.3

 
 
Expected Total
 
$
15.0

 
$
11.3

 
$
4.6

 
$
7.3

 
$
69.8

 
$
108.0

(1)
We have defined “Net property, plant and equipment” as used in this Note 7 as property, plant and equipment, impairment losses, subsequent adjustments to fair value for assets classified as held for sale, and subsequent (gains) or losses on sales of property, plant and equipment and related parts and supplies and accelerated depreciation on such assets.
When we close a facility, if necessary, we recognize an impairment charge primarily to reduce the carrying value of equipment or other property to their estimated fair value less cost to sell, and record charges for severance and other employee related costs. Any subsequent change in fair value, less cost to sell, prior to disposition is recognized as identified; however, no gain is recognized in excess of the cumulative loss previously recorded. At the time of each announced closure, we generally expect to record future charges for equipment relocation, facility carrying costs, costs to terminate a lease or contract before the end of its term and other employee related costs. Expected future charges are reflected in the table above in the “Expected Total” lines until incurred.

(a)
The Corrugated Packaging segment current year charges primarily reflect the announced closure of four corrugated

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Notes to Condensed Consolidated Statements (Unaudited) (Continued)

container plants acquired in the Smurfit-Stone Acquisition and our Hauppauge, New York sheet plant (recorded in fiscal 2010 and closed in fiscal 2011). The cumulative charges are primarily the five facilities mentioned above and for the impairment of certain assets and a customer relationship intangible at one of our corrugated graphics subsidiaries and our Greenville, South Carolina sheet plant (announced in fiscal 2008 and closed in fiscal 2009). We have transferred a substantial portion of the Hauppauge and Greenville plants’ production to our other corrugated plants and expect to transfer a substantial portion of the four corrugated container plants production as well.
(b)
The Consumer Packaging segment current year charges primarily reflect the announced closure of our Milwaukee, Wisconsin folding carton facility and reflect the closure of our El Paso, Texas, Cicero, Illinois and Santa Fe, California (each announced and closed in fiscal 2011) and Keene, New Hampshire (announced and closed in fiscal 2010) interior packaging plants, and our Columbus, Indiana laminated paperboard converting operation (announced and closed in fiscal 2010), and our Macon, Georgia drum manufacturing operation (announced and closed in fiscal 2010). The cumulative charges primarily reflect the actions mentioned above as well as the closure of our Baltimore, Maryland folding carton facility (announced in fiscal 2008 and closed in fiscal 2009) as well as our Drums, Pennsylvania and Litchfield, Illinois interior packaging plants (announced and closed in fiscal 2010 and 2009, respectively) and impairment of certain assets, severance and lease liabilities associated with our fiscal 2010 acquisition of Innerpac Holding Company. Although specific circumstances vary, our strategy has generally been to consolidate our sales and operations into large well-equipped plants that operate at high utilization rates and take advantage of available capacity created by operational excellence initiatives. Therefore, we transfer a substantial portion of each plant’s assets and production to our other plants. We believe these actions have allowed us to more effectively manage our business.
(c)
The Recycling and Waste Solutions segment charges primarily reflect carrying costs for two collections facilities shutdown in a prior year.
(d)
The expenses in the “Other Costs” column primarily reflect costs incurred as a result of the Smurfit-Stone Acquisition. The pre-tax charges are summarized below (in millions):
 
Acquisition
Expenses
 
Integration
Expenses
 
Other
Expenses
 
Total
Current Qtr.
$
12.2

 
$
29.5

 
$
—

 
$
41.7

YTD Fiscal 2011
16.2

 
31.7

 
—

 
47.9

Acquisition expenses also include expenses associated with other acquisitions not consummated. Acquisition expenses primarily consist of advisory, legal, accounting, valuation and other professional or consulting fees. Integration expenses reflect primarily severance and other employee costs and professional services for work being performed to facilitate the Smurfit-Stone integration. We are currently evaluating the amount of expenses we expect to incur as a result of the Smurfit-Stone integration.
The following table represents a summary of and the changes in the restructuring accrual, which is primarily composed of accrued severance and other employee costs, and lease commitments, and a reconciliation of the restructuring accrual to the line item “Restructuring and other costs, net” on our Condensed Consolidated Statements of Operations for the nine months ended June 30, 2011 and June 30, 2010 (in millions):
 
2011
 
2010
Accrual at beginning of fiscal year
$
1.4

 
$
1.1

Accruals acquired in Smurfit-Stone Acquisition
11.9

 
—

Additional accruals
27.8

 
1.1

Payments
(2.6
)
 
(1.3
)
Adjustment to accruals
—

 
0.1

Accrual at June 30,
$
38.5

 
$
1.0


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Notes to Condensed Consolidated Statements (Unaudited) (Continued)

Reconciliation of accruals and charges to restructuring and other costs, net:
 
 
 
 
2011
 
2010
Additional accruals and adjustments to accruals (see table above)
$
27.8

 
$
1.2

Acquisition expenses
16.2

 
—

Integration expenses
11.5

 
—

Net property, plant and equipment
5.2

 
2.1

Severance and other employee costs
0.3

 
0.2

Equipment relocation
0.4

 
0.1

Facility carrying costs
0.9

 
0.1

Other
0.1

 
0.4

Total restructuring and other costs, net
$
62.4

 
$
4.1

Note 8.
Income Taxes
We recorded an income tax benefit of $17.6 million and income tax expense of $27.2 million in the three and nine months ended June 30, 2011 compared to income tax expense of $27.0 million and $60.7 million in the three and nine months ended June 30, 2010. The effective tax rates for the three and nine months ended June 30, 2011 were approximately 38.3% and 30.8%, respectively. The effective tax rates for the three and nine months ended June 30, 2010 were approximately 36.5% and 30.5%, respectively. The effective tax rates for the three and nine months ended June 30, 2011 were different than the statutory rate primarily due to the impact of finalizing certain estimates included in our 2010 tax returns in the third quarter, the second quarter release of a valuation allowance related to state credits and the reinstatement of the federal research and development credit in the first quarter. The effective tax rates for the three and nine months ended June 30, 2010 were different from the statutory rate primarily due to the impact of the alternative fuel mixture credit which was excluded from taxable income.
Primarily as a result of the Smurfit-Stone Acquisition, at June 30, 2011, the gross amount of unrecognized tax benefits was approximately $279.4 million, exclusive of interest and penalties. We recorded $265.4 million of gross unrecognized tax benefit in the quarter related to the Smurfit-Stone Acquisition as part of the allocation of purchase price. There were no other significant changes to recorded liabilities for uncertain tax positions during the current fiscal year. We are in the process of evaluating these gross unrecognized tax benefits recorded as a result of the Smurfit-Stone Acquisition. The amount of gross unrecognized tax benefit recorded and the amount that would benefit the effective tax rate may change based on the completion of that evaluation. In addition, we regularly evaluate, assess and sometimes adjust the unrecognized tax benefits in light of changing facts and circumstances, which could cause the effective tax rate to fluctuate from period to period. Subject to any adjustments to acquired uncertain tax positions discussed above, if we were to prevail on all unrecognized tax benefits recorded, approximately $270.0 million would benefit the effective tax rate.
We recognize interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2011, we had a recorded liability of $3.9 million for the payment of interest and penalties.
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 2007.
Note 9.
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):

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Notes to Condensed Consolidated Statements (Unaudited) (Continued)

 
June 30,
2011
 
September 30,
2010
Finished goods and work in process
$
334.4

 
$
149.6

Raw materials
388.4

 
118.8

Supplies and spare parts
169.3

 
50.1

Inventories at FIFO cost
892.1

 
318.5

LIFO reserve
(58.4
)
 
(49.0
)
Net inventories
$
833.7

 
$
269.5


Note 10.
Debt
For more information regarding certain of our debt characteristics, see “Note 10. Debt” of the Notes to Consolidated Financial Statements section of the Fiscal 2010 Form 10-K.
The following were individual components of debt (in millions): 
 
June 30,
2011
 
September 30,
2010
8.20% secured notes due August 2011, including hedge adjustments resulting from terminated interest rate swaps of $0.2 million and $1.2 million(a)
$
154.9

 
$
155.8

5.625% secured notes due March 2013, including hedge adjustments resulting from terminated interest rate swaps of $0.5 million and $0.7 million, net of unamortized discount of $0.1 and $0.1(a)
80.9

 
81.1

9.25% unsecured notes due March 2016, net of unamortized discount of $0.8 and 0.9(a)
299.2

 
299.1

Term loan facilities(b)
2,225.0

 
470.1

Revolving credit and swing facilities(b)
95.3

 
11.3

Receivables-backed financing facility(c)
581.0

 
75.0

Industrial development revenue bonds, bearing interest at variable rates (2.72% at June 30, 2011 and 2.06% at September 30, 2010); due at various dates through October 2036(d)
17.4

 
17.4

Other notes
29.7

 
19.1

Total debt
3,483.4

 
1,128.9

Less current portion of debt
241.5

 
231.6

Long-term debt due after one year
$
3,241.9

 
$
897.3

 
 
 
 
The following were the aggregate components of debt (in millions):
 
 
 
Face value of debt instruments, net of unamortized discounts
$
3,482.7

 
$
1,127.0

Hedge adjustments resulting from terminated interest rate swaps
0.7

 
1.9

Total debt
$
3,483.4

 
$
1,128.9

A portion of the debt classified as long-term, which includes the term loans, receivables-backed, revolving and swing facilities, may be paid down earlier than scheduled at our discretion without penalty.
(a)
Interest on our 8.20% notes is due on August 15, 2011 at maturity. Interest on our 5.625% notes due March 2013 (“March 2013 Notes”) and our 9.25% senior notes due March 2016 (“March 2016 Notes”) is payable in arrears each March and September.
(b)
On May 27, 2011, we entered into a Credit Agreement (the "Credit Facility") with an original maximum principal amount of $3.7 billion. The Credit Facility includes a $1.475 billion, 5-year revolving credit facility, a $1.475 billion, 5-year term loan A facility, and $750 million, 7-year term loan B facility. The Credit Facility is pre-payable at any time. The borrowings under the Credit Facility on the closing date of the Smurfit-Stone Acquisition were used to finance the acquisition in part, to repay certain outstanding indebtedness of Smurfit-Stone, to refinance certain of our existing credit facilities, to pay for fees and expenses incurred in connection with the acquisition, and for other corporate purposes. We may borrow amounts under the revolving credit facility to provide for working capital and general corporate requirements, including acquisitions permitted pursuant to the Credit Facility. Up to $250.0 million under the revolving credit facility may be used for the issuance of letters of credit. In addition, up to $300.0 million of the revolving credit facility may be used to

15
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Notes to Condensed Consolidated Statements (Unaudited) (Continued)

fund borrowings in Canadian dollars. At June 30, 2011, the amount committed under the Credit Facility for loans to a Canadian subsidiary was $50.0 million. At June 30, 2011, available borrowings under the revolving credit portion of the Credit Facility, reduced by outstanding letters of credit not drawn upon of approximately $115.3 million, were approximately $1,264.4 million.
At our option, borrowings under the Credit Facility bear interest at either a base rate or at the London Interbank Offered Rate ("LIBOR"), plus, in each case, an applicable margin. In addition, advances in Canadian dollars may be made by way of purchases of bankers' acceptances. We are required to pay fees in respect of outstanding letters of credit at a rate equal to the applicable margin for LIBOR-based borrowings based upon a Credit Agreement Leverage Ratio. 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, 2011
Applicable margin/percentage for determining:
 
 
 
LIBOR-based loans and banker's acceptance advances interest rate (1)
1.50%-2.25%
 
2.0%
Base rate-based borrowings (1)
0.50%-1.25%
 
1.0%
Facility commitment (2)
0.25%-0.35%
 
0.35%
(1)    The rates vary based on our Leverage Ratio, as defined in the Credit Agreement.
(2)    Applied to the aggregate borrowing availability based on the Leverage Ratio, as defined below.
The variable interest rate, including the applicable margin, on our term loan A facility, before the effect of interest rate swaps, was 2.19% at June 30, 2011. Interest rates on our revolving credit facility for borrowings both in the U.S. and Canada ranged from 2.19% to 4.25% at June 30, 2011.
Borrowings under the term loan B facility have applicable margins of 2.75% for LIBOR-based loans (with LIBOR to be no lower than 0.75%) and 1.75% for base rate-based loans.
All obligations under the Credit Facility are fully and unconditionally guaranteed by our existing and future wholly-owned U.S. subsidiaries, including Smurfit-Stone's existing and future wholly-owned U.S. subsidiaries, other than certain present and future unrestricted subsidiaries and certain other limited exceptions as well as a pledge of subsidiary stock of certain wholly-owned subsidiaries. In addition, the obligations of Rock-Tenn Company of Canada and certain other Canadian subsidiaries are guaranteed by us and all such wholly-owned U.S. subsidiaries, as well as by wholly-owned Canadian subsidiaries of RockTenn, other than certain present and future unrestricted subsidiaries and certain other limited exceptions.
The Credit Facility contains certain prepayment requirements and customary affirmative and negative covenants. The negative covenants include covenants that, subject to certain exceptions, contain: limitations on liens and further negative pledges; limitations on sale-leaseback transactions; limitations on debt and prepayments, redemptions or repurchases of certain debt and equity; limitations on mergers and asset sales; limitations on sales, transfers and other dispositions of assets; limitations on loans and certain other investments; limitations on restrictions affecting subsidiaries; (i) limitations on transactions with affiliates; (ii) limitations on changes to accounting policies or (iii) fiscal periods; limitations on speculative hedge transactions; and restrictions on modification or waiver of material documents in a manner materially adverse to the lenders.
In addition, the term loan A and the revolving credit facility include financial covenants requiring that we maintain a maximum total leverage ratio and minimum interest coverage ratio. The terms of the Credit Facility require us to maintain a leverage ratio (the ratio of our total funded debt less certain amounts of unrestricted cash, to Credit Agreement EBITDA, as defined, for the preceding four fiscal quarters ("Leverage Ratio")) not greater than 3.75 to 1.00 for fiscal quarters ending from June 30, 2011 through June 30, 2012, and not greater than 3.50 to 1.00 for fiscal quarters ending thereafter. In addition, we must maintain an interest coverage ratio (the ratio of Credit Agreement EBITDA for the preceding four fiscal quarters to its cash interest expense for such period) not less than 3.50 to 1.00 for any fiscal quarters ending on or after September 30, 2011. "Credit Agreement EBITDA" is calculated in accordance with the definition contained in our Credit Agreement. Credit Agreement EBITDA is generally defined as consolidated net income of RockTenn for any fiscal period plus the following to the extent deducted in determining such consolidated net income: (i) consolidated interest expense, (ii) consolidated tax expenses, (iii) depreciation and amortization expenses, (iv) financing expenses and write-offs, remaining portions of original issue discount on prepayment of indebtedness, prepayment premiums and commitment fees, (v) inventory expenses associated with the write up of Smurfit-Stone inventory acquired in the merger and other permitted acquisitions, (vi) all other non-cash charges, (vii) all legal, accounting and professional advisory expenses incurred in respect of the Smurfit-Stone Acquisition and other permitted acquisitions and related financing

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Notes to Condensed Consolidated Statements (Unaudited) (Continued)

transactions, (vii) certain expenses and costs incurred in connection with the Smurfit-Stone Acquisition and associated synergies, restructuring charges, and certain other charges and expenses, subject to certain limitations specified in the Credit Facility, (viii) certain other charges and expenses unrelated to the Smurfit-Stone Acquisition subject to certain specified limitations in the Credit Facility, and (ix) for certain periods, run-rate synergies expected to be achieved due to the Smurfit-Stone Acquisition not already included in EBITDA and adjusted to include Smurfit-Stone EBITDA as outlined in the Credit Agreement related to periods prior to the acquisition. We test and report our compliance with these covenants each quarter. We are in compliance with all of our covenants.
The credit facilities also contain certain customary events of default, including relating to non-payment, breach of representations, warranties or covenants, default on other material debt, bankruptcy and insolvency events, invalidity or impairment of loan documentation, collateral or subordination provisions, change of control and customary ERISA defaults. The term "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations thereunder.

On May 27, 2011, at the effective time of the Smurfit-Stone Acquisition, in connection with our entry into the Credit Facility, we terminated our existing credit agreement, dated as of March 5, 2008, as amended (the "Terminated Credit Facility"), following the payment in full of all outstanding indebtedness under the Terminated Credit Facility. There were no material early termination penalties incurred as a result of the termination of the Terminated Credit Facility. We recorded a loss on extinguishment of debt of $39.5 million primarily for fees paid to certain creditors and third parties and to write-off certain unamortized deferred financing costs related to the Terminated Credit Facility and capitalized approximately $42.6 million of debt issuance costs in other assets related to the new credit agreements, including amounts related to our receivables-backed financing facility.
(c)
On May 27, 2011, we increased our receivables-backed financing facility (the “Receivables Facility”) to $625.0 million from $135.0 million. The Receivables Facility has been amended to include the trade receivables of additional RockTenn subsidiaries. In addition, the maturity date of the Receivables Facility has been extended until the third anniversary of the Smurfit-Stone Acquisition. At June 30, 2011, we had $581.0 million outstanding and at September 30, 2010, we had $75.0 million outstanding under our Receivables Facility. Accordingly, such borrowings are classified as long-term at June 30, 2011 and September 30, 2010. The borrowing rate, which consists of a blend of the market rate for asset-backed commercial paper and the one month LIBOR rate plus a utilization fee, was 1.22% and 2.08% as of June 30, 2011 and September 30, 2010, respectively. The commitment fee for this facility was 0.30% and 1.00% as of June 30, 2011 and September 30, 2010, respectively. Borrowing availability under this facility is based on the eligible underlying accounts receivable and certain covenants. The agreement governing the Receivables Facility contains restrictions, including, among others, on the creation of certain liens on the underlying collateral. We test and report our compliance with these covenants monthly. We are in compliance with all of our covenants. At June 30, 2011 and September 30, 2010, maximum available borrowings, excluding amounts outstanding, under this facility were approximately $581.0 million and $135.0 million, respectively. The carrying amount of accounts receivable collateralizing the maximum available borrowings at June 30, 2011 was approximately $882.1 million. We have continuing involvement with the underlying receivables as we provide credit and collections services pursuant to the securitization agreement.
(d)
The industrial development revenue bonds (“IDBs”) 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, 2011, the outstanding amount of direct pay letters of credit supporting all IDBs was $17.7 million. The letters of credit are renewable at our request so long as no default or event of default has occurred under the Credit Facility.

Note 11.
Derivatives
We are exposed to interest rate risk, commodity price risk and foreign currency exchange risk. To manage these risks, from time-to-time and to varying degrees, we enter into a variety of financial derivative transactions and certain physical commodity transactions that are determined to be derivatives. Interest rate swaps may be entered into to manage the interest rate risk associated with a portion of our outstanding debt. Interest rate swaps are either designated as cash flow hedges of forecasted floating rate interest payments on variable rate debt or fair value hedges of fixed rate debt, or we may elect not to treat them as accounting hedges. Forward contracts on certain commodities may be entered into to manage the price risk associated with forecasted purchases or sales of those commodities. In addition, certain commodity derivative contracts and physical commodity contracts that are determined to be derivatives are not designated as accounting hedges because either they do not meet the criteria for treatment as accounting hedges under ASC 815, “Derivatives and Hedging”, or we elect not to treat them as accounting hedges under ASC 815. We may also enter into forward contracts to manage our exposure to fluctuations in Canadian foreign currency rates with respect to transactions denominated in Canadian dollars.
Outstanding financial derivative instruments expose us to credit loss in the event of nonperformance by the counterparties to

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Notes to Condensed Consolidated Statements (Unaudited) (Continued)

the agreements. Our credit exposure related to these financial instruments is represented by the fair value of contracts reported as assets. We manage our exposure to counterparty credit risk through minimum credit standards, diversification of counterparties and procedures to monitor concentrations of credit risk.
Cash Flow Hedges
For derivative instruments that are designated as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction, and in the same period or periods during which the forecasted transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
We have entered into interest rate swap agreements that effectively modify our exposure to interest rate risk by converting a portion of our interest payments on floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. These agreements involve the receipt of floating rate amounts in exchange for fixed interest rate payments over the life of the agreements without an exchange of the underlying principal amount. We have designated these swaps as cash flow hedges of the interest rate exposure on an equivalent amount of certain variable rate debt. As of June 30, 2011, our interest rate swap agreements, which terminate in April 2012, require that we pay fixed rates of approximately 4.00% and receive the one-month LIBOR rate on the notional amounts. As of June 30, 2011, the aggregate notional amount of outstanding debt related to these interest rate swaps was $216 million, declining at periodic intervals to an aggregate notional amount of $132 million prior to expiration. On July 1, 2011, the aggregate notional amount of these swaps declined to $196 million.
Fair Value Hedges
For derivative instruments that are designated and qualify 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 the same line item associated with the hedged item in current earnings. Prior to June 2005, we had a series of interest rate swaps that effectively converted our fixed rate debt to floating rates, thus hedging the fair value of the related fixed rate debt from changes in market interest rates. These interest rate swaps were terminated prior to maturity. The value at termination of these swaps is being amortized to interest expense over the remaining life of the related debt using the effective interest method. During the three months ended June 30, 2011 and June 30, 2010, $0.4 million and $0.4 million, respectively, were amortized to earnings as a reduction of interest expense. During the nine months ended June 30, 2011 and June 30, 2010, $1.2 million and $1.2 million, respectively, were amortized to earnings as a reduction of interest expense.
Derivatives not Designated as Accounting Hedges
We have entered into certain pay-fixed, receive-floating interest rate swap agreements with an aggregate notional amount of $16.6 million. The weighted average fixed rate of interest paid on these interest rate swaps is 3.89% and the floating interest rate received is the three-month LIBOR rate. These interest rate swap agreements have a forward-starting date of December 15, 2011 and a ten-year term. However, both agreements have a mandatory early termination date of December 15, 2011, at which time we will either receive a lump-sum from or pay a lump-sum to our counterparty to terminate the swaps. These interest rate swaps have not been designated as accounting cash flow hedges, and accordingly, the gain or loss is recognized in current earnings.
In connection with our Smurfit-Stone Acquisition we acquired a foreign currency exchange forward contract intended to minimize the exposure to currency exchange rate fluctuations on the Canadian dollar related to a $255 million inter-company Canadian denominated note. This contract expired on June 30, 2011 and we recorded a net gain of $0.6 million related to the settlement of the contract.

As of June 30, 2011 and September 30, 2010, we had the following outstanding commodity derivatives related to forecasted transactions that were not designated as accounting hedges:
 
 
June 30, 2011
 
September 30, 2010
Commodity
Notional
Amount
 
Unit
 
Notional
Amount
 
Unit
Fiber purchases, net
8,000
 
Tons
 
24,500
 
Tons
Fair Values of Derivative Instruments
The following table summarizes the location and amounts of our outstanding derivative instruments fair values in the Condensed Consolidated Balance Sheets segregated by type of contract, by assets and liabilities and by designation (in millions):

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Notes to Condensed Consolidated Statements (Unaudited) (Continued)

 
 
Asset Derivatives
 
Liability Derivatives
Type of Derivative
Balance Sheet
Location
June 30, 2011
 
September 30, 2010
Balance Sheet
Location
June 30, 2011
 
September 30, 2010
Fair Value
 
Fair Value
Fair Value
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
Interest rate
N/A
$
—

 
$
—

Other current liabilities
$
5.5

 
$
8.7

Interest rate
N/A
—

 
—

Other long-term liabilities
—

 
3.3

 
 
$
—

 
$
—

 
$
5.5

 
$
12.0

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
Interest rate
Other assets
$
—

 
$
—

Other current liabilities
$
0.6

 
$
—

Interest rate
N/A
—

 
—

Other long-term liabilities
—

 
1.2

Commodity
Other current assets
1.5

 
1.2

Other current liabilities
1.0

 
0.4

Commodity
Other assets
—

 
0.2

Other long-term liabilities
—

 
—

 
 
$
1.5

 
$
1.4

 
$
1.6

 
$
1.6

 
 
 
 
 
 
 
 
 
Total fair values
 
$
1.5

 
$
1.4

 
$
7.1

 
$
13.6

The following tables summarize the location and amount of gains and losses on derivative instruments in the Condensed Consolidated Statements of Income segregated by type of contract and designation for the three and nine months ended June 30, (in millions):
Derivatives in Cash Flow Hedging Relationships:
Amount of gain or (loss) recognized in other comprehensive income on derivative – effective portion for the three and nine months ended June 30, (in millions):
For the three months ended:
            Type of Derivative
2011
 
2010
Interest rate
$
(0.2
)
 
$
(1.5
)
For the nine months ended:
            Type of Derivative
2011
 
2010
Interest rate
$
(0.5
)
 
$
(5.1
)
Commodity
—

 
0.3

Total
$
(0.5
)
 
$
(4.8
)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income – effective portion, and location of where gain or (loss) is recorded for the three and nine months ended June 30, (in millions):
For the three months ended:
            Type of Derivative
Location
2011
 
2010
Interest rate
Interest expense
$
(1.6
)
 
$
(2.5
)
Commodity
Net sales
—

 
0.1

Total
 
$
(1.6
)
 
$
(2.4
)

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Notes to Condensed Consolidated Statements (Unaudited) (Continued)

For the nine months ended:
            Type of Derivative
Location
2011
 
2010
Interest rate
Interest expense
$
(5.3
)
 
$
(8.5
)
Commodity
Net sales
—

 
0.8

Total
 
$
(5.3
)
 
$
(7.7
)
Amount of gain or (loss) recognized in income on derivative – ineffective portion and amount excluded from effectiveness testing, and location of where gain or (loss) is recorded for the three and nine months ended June 30, (in millions):
For the three months ended:
            Type of Derivative
Location
2011
 
2010
Commodity
Net sales
$
—

 
$
—

For the nine months ended:
            Type of Derivative
Location
2011
 
2010
Commodity
Net sales
$
—

 
$
(0.6
)
Derivatives Not Designated As Hedging Instruments:
Amount of gain or (loss) recognized in income on derivative and location of where gain or (loss) is recorded for the three and nine months ended June 30, (in millions):
For the three months ended:
            Type of Derivative
Location
2011
 
2010
Interest rate
Selling, general and administrative expenses
$
(0.5
)
 
$
(1.3
)
Foreign Currency Exchange
Interest income and other income, net
0.6

 
—

Commodity
Net sales
0.2

 
(0.9
)
Total
 
$
0.3

 
$
(2.2
)
For the nine months ended:
            Type of Derivative
Location
2011
 
2010
Interest rate
Selling, general and administrative expenses
$
0.6

 
$
(0.9
)
Foreign Currency Exchange
Interest income and other income, net
0.6

 
—

Commodity
Net sales
0.4

 
0.5

Total
 
$
1.6

 
$
(0.4
)
As of June 30, 2011, based on implied forward interest rates associated with our outstanding interest rate derivative cash flow hedges and the remaining amounts in accumulated other comprehensive income related to terminated interest rate swaps, we expect to reclassify net pre-tax deferred losses of approximately $3.8 million from accumulated other comprehensive income into earnings as an increase to interest expense within the next twelve months as the probable hedged interest payments occur. We believe amounts in accumulated other comprehensive income related to interest rate derivatives and commodity derivatives are appropriately included as a component of accumulated other comprehensive income because the forecasted transactions related to those amounts are probable of occurring.
We enter into derivative contracts that may contain credit-risk-related contingent features which could result in a counterparty requesting immediate payment or demanding immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. Certain of our interest rate swap derivative contracts contain a provision whereby if we default on the Credit Facility, we may also be deemed in default of the interest rate swap obligation. The aggregate fair value of interest rate swaps under these agreements that are in a liability position on June 30, 2011, is approximately $5.5 million. These interest rate swaps share the same collateral as that of our Credit Facility and no other collateral has been posted by us against these interest rate swap obligations. If we were to default on these agreements, we may be required to settle our obligations at their termination value of approximately $5.5 million. Certain of our commodity derivative contracts contain contingent provisions that require us to provide

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Notes to Condensed Consolidated Statements (Unaudited) (Continued)

the counterparty with collateral if the credit rating on our debt, as provided by major credit rating agencies, falls below certain specified minimums, or if the fair value of our obligation exceeds specified threshold amounts. The aggregate fair value of all commodity derivative instruments with these contingent features that are in a liability position on June 30, 2011 is approximately $0.8 million.
Note 12.
Fair Value
Assets and Liabilities Measured at Fair Value
We estimate fair values in accordance with ASC 820 “Fair Value Measurements and Disclosures”. ASC 820 provides a framework for measuring fair value and expands disclosures required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and a hierarchy prioritizing the inputs to valuation techniques. ASC 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Additionally, ASC 820 defines levels within the hierarchy as follows:
•
Level 1 – Unadjusted quoted prices for identical assets and liabilities in active markets;
•
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in inactive markets, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
•
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Such inputs typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
We have rabbi trusts which hold the assets of our supplemental retirement savings plans (the “Supplemental Plans”) that are nonqualified deferred compensation plans. The assets of our Supplemental Plans are invested primarily in mutual funds and are reported at fair value based on quoted prices in active markets. The fair value of our Supplemental Plans is designated as Level 1.
We value our interest rate derivatives using a widely accepted valuation technique based on discounted cash flow analysis, which reflects the terms of the derivatives and, for all significant assumptions, uses observable market-based inputs, including LIBOR forward interest rate curves. The fair value of our interest rate derivatives is designated as Level 2.
We value our commodity derivatives based on discounted cash flow analysis using forward price curves derived from market price quotations with internal and external fundamental data inputs. Market price quotations are obtained from independent derivatives brokers and from direct communication with market participants. As our commodity derivatives trade in less liquid markets or may have limited observable forward prices, we have designated the fair value of our commodity derivatives as Level 3.
In connection with the Smurfit-Stone Acquisition we acquired an interest in various installment notes that originated from Smurfit-Stone's sale of owned and leased timberland for cash and installment notes. Smurfit-Stone entered into a program to monetize the installment notes receivable. The various installment notes were sold without recourse to Timber Note Holdings (a non-consolidated variable interest entity “TNH”) in a transaction accounted for as a sale under ASC 860. The fair value of the residual interest in the TNH investment is estimated using discounted residual cash flows. We have designated the fair value of our Timber Note Holdings investment as Level 3.
We incorporate credit valuation adjustments to reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in our fair value measurements.
As of June 30, 2011, the fair value of our financial assets and liabilities that are measured at fair value on a recurring basis, for each hierarchy level, is summarized in the following table (in millions):
 

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Notes to Condensed Consolidated Statements (Unaudited) (Continued)

 
Level 1        
 
Level 2        
 
Level 3        
 
Total        
Assets:
 
 
 
 
 
 
 
Supplemental Plans
$
5.6

 
$
—

 
$
—

 
$
5.6

Interest rate derivatives
$
—

 
$
—

 
$
—

 
$
—

Commodity derivatives
$
—

 
$
—

 
$
1.5

 
$
1.5

Timber Note Holdings Investment
$
—

 
$
—

 
$
22.0

 
$
22.0

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate derivatives
$
—

 
$
6.1

 
$
—

 
$
6.1

Commodity derivatives
$
—

 
$
—

 
$
1.0

 
$
1.0

The following table provides a summary of the net changes in the fair values of our Level 3 Commodity derivatives for the nine months ended June 30, (in millions):
 
2011
 
2010
Beginning asset balance, net
$
1.0

 
$
0.6

Realized and unrealized net gains recorded in net sales
0.4

 
0.2

Settlements
(0.9
)
 
(0.5
)
Ending asset balance, net
$
0.5

 
$
0.3

The following table provides a summary of the net changes in the fair values of our Level 3 Timber Notes Holding Investment since the Smurfit acquisition, (in millions):
 
2011
Acquired asset balance
$
21.8

Realized and unrealized net gains recorded in equity income
0.2

Settlements
—

Ending asset balance
$
22.0

The following table provides a summary of unrealized net gains and losses during the nine months ended June 30, 2011 and June 30, 2010 that are attributable to changes in unrealized gains and losses of Level 3 derivatives assets and liabilities still held at June 30, 2011 and June 30, 2010 (in millions):
 
2011
 
2010
Unrealized net gain recorded in net sales
$
0.2

 
$
0.4

Financial Instruments not Recognized at Fair Value
Financial instruments not recognized at fair value on a recurring or nonrecurring basis include cash and cash equivalents, accounts receivable, certain other current assets, short-term debt, accounts payable, certain other current liabilities, and long-term debt. With the exception of long-term debt, the carrying amounts of these financial instruments approximate their fair values due to their short maturities.

The following table summarizes the carrying amount and estimated fair value of our long-term debt (in millions):

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Notes to Condensed Consolidated Statements (Unaudited) (Continued)

 
June 30, 2011
 
September 30, 2010
 
Carrying
    Amount     
 
Fair
    Value     
 
Carrying
    Amount     
 
Fair
    Value     
August 2011 Notes(1)
$
154.9

 
$
154.9

 
$
155.8

 
$
162.8

March 2013 Notes(1)
80.9

 
84.4

 
81.1

 
84.1

March 2016 Notes(1)
299.2

 
325.5

 
299.1

 
330.0

Term loan facilities(3)
2,225.0

 
2,225.0

 
470.1

 
466.1

Revolving credit and swing facilities(3)
95.3

 
95.3

 
11.3

 
11.3

Receivables-backed financing facility(3)
581.0

 
581.0

 
75.0

 
75.0

Industrial development revenue bonds(3)
17.4

 
17.4

 
17.4

 
17.4

Other fixed rate long-term debt(2)
29.7

 
31.7

 
19.1

 
20.5

Total debt
$
3,483.4

 
$
3,515.2

 
$
1,128.9

 
$
1,167.2

(1)
Fair value is based on the quoted market prices for the same or similar issues.
(2)
Fair value is estimated based on the discounted value of future cash flows using current market interest rates offered for debt of similar credit risk and maturity.
(3)
Fair value approximates the carrying amount as the variable interest rates reprice frequently at current market rates.
In the absence of quoted prices in active markets, considerable judgment is required in developing estimates of fair value. Estimates are not necessarily indicative of the amounts we could realize in a current market transaction.
Note 13.
Retirement Plans
We have defined benefit pension plans for certain U.S. and Canadian employees. 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 also have a Supplemental Executive Retirement Plan (“SERP”) that provides unfunded supplemental retirement benefits to certain of our executives and former executives. The SERP provides for incremental pension benefits in excess of those offered in our principal pension plan.
For the RockTenn plans prior to the Smurfit-Stone Acquisition, salaried and nonunion hourly employees hired on or after January 1, 2005 are not eligible to participate in our defined benefit plans. However, we provide an enhanced 401(k) plan match for such employees as discussed in “Note 15. Retirement Plans” of the Notes to Consolidated Financial Statements section of the Fiscal 2010 Form 10-K. For the plans acquired in the Smurfit-Stone Acquisition, the defined benefit pension plans cover substantially all hourly employees, as well as salaried employees hired prior to January 1, 2006. The plans acquired in the Smurfit-Stone Acquisition were frozen for salaried employees effective January 1, 2009 and March 1, 2009 for the U.S. and Canadian defined benefit pension plans, respectively.
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,
 
2011
 
2010
 
2011
 
2010
Service cost
$
4.9

 
$
2.7

 
$
10.3

 
$
8.2

Interest cost
25.2

 
6.0

 
37.5

 
17.9

Expected return on plan assets
(24.6
)
 
(6.0
)
 
(37.1
)
 
(17.9
)
Amortization of prior service cost
0.1

 
0.3

 
0.5

 
0.7

Amortization of net actuarial loss
4.8

 
4.8

 
14.2

 
14.5

Company defined benefit plan expense
10.4

 
7.8

 
25.4

 
23.4

Multi-employer plans for collective bargaining employees
1.1

 
0.5

 
2.1

 
1.4

Net pension cost
$
11.5

 
$
8.3

 
$
27.5

 
$
24.8

During the three and nine months ended June 30, 2011, we contributed an aggregate of $13.5 million and $20.0 million, respectively, to our pension and supplemental retirement plans. Based on our current assumptions, we estimate contributing an additional $35 million in fiscal 2011 to our pension and supplemental retirement plans. However, it is possible that our assumptions may change, actual market performance may vary or we may decide to contribute additional amounts. We contributed an aggregate

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of $17.2 million and $20.2 million to our pension and supplemental retirement plans in both the three and nine months ended June 30, 2010, respectively.
The postretirement benefit plans acquired in the Smurfit-Stone Acquisition provide certain health care and life insurance benefits for all retired salaried and certain retired hourly employees, and for salaried and certain hourly employees who reached the age of 60 with 10 years of service as of January 1, 2007.
The following table represents a summary of the components of the postretirement benefits costs (in millions):
 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
 
2011
 
2011
Service cost
$
0.2

 
$
0.2

Interest cost
0.8

 
0.8

Company postretirement plan expense
1.0

 
1.0

During the three and nine months ended June 30, 2011, we contributed an aggregate of $0.8 million to our postretirement benefit plans.
Note 14.
Share-Based Compensation
Stock Options
During the second quarter of fiscal 2011, we granted options to purchase 110,475 shares of our Class A common stock “Common Stock” to certain employees. These options vest three years from the grant date. These grants were valued at $26.54 per share using the Black-Scholes option pricing model. The approximate assumptions used were: an expected term of 5.1 years; an expected volatility of 47.0%; expected dividends of 1.4%; and a risk free rate of 2.1%. We amortize these costs using the accelerated attribution method.
As part of the Smurfit-Stone Acquisition, outstanding options to purchase Smurfit-Stone common stock under the Smurfit-Stone equity-based compensation plan were assumed by RockTenn and converted into a vested option to purchase RockTenn Common Stock based on an equity award exchange ratio. We issued 1,314,251 vested options that were valued at $42.89 per share using the Black-Scholes option pricing model. Significant assumptions used were: an expected term of 3.5 years; an expected volatility of 48.8%; expected dividends of 1.4%; and a risk free rate of 1.1%. Accordingly, $56.4 million was included in the Smurfit-Stone Acquisition purchase price.
The aggregate intrinsic value of options exercised during the three months ended June 30, 2011 and June 30, 2010 was $29.7 million and $1.3 million, respectively, and during the nine months ended June 30, 2011 and June 30, 2010 it was $31.2 million and $4.9 million, respectively.
The table below summarizes the changes in all stock options during the nine months ended June 30, 2011:
 
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
 (in years)
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding at September 30, 2010
936,754

 
$
29.44

 
 
 
 
Granted
1,424,726

 
40.50

 
 
 
 
Exercised
(851,513
)
 
37.23

 
 
 
 
Expired
—

 
—

 
 
 
 
Forfeited
(3,255
)
 
33.78

 
 
 
 
Outstanding at June 30, 2011
1,506,712

 
$
35.49

 
6.6
 
$
46.7

Exercisable at June 30, 2011
1,120,603

 
$
31.95

 
5.9
 
$
38.5

Restricted Stock
During the second quarter of fiscal 2011, we granted 18,000 shares of restricted stock, which vest over one year to our non-employee directors and target awards of 195,050 shares of restricted stock with a service and a performance condition that vest over three years, to certain employees pursuant to our 2004 Incentive Stock Plan, as amended.

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Table of Contents
Notes to Condensed Consolidated Statements (Unaudited) (Continued)

As part of the Smurfit-Stone Acquisition, outstanding restricted stock units for Smurfit-Stone board of directors members who will be serving on the RockTenn board of directors were converted into RockTenn restricted stock units of 2,155 shares.

The aggregate fair value of restricted stock that vested during the three months ended June 30, 2011 and June 30, 2010 was $9.5 million and $7.4 million, respectively, and during the nine months ended June 30, 2011 and June 30, 2010 it was $28.0 million and $16.9 million, respectively.

Certain of our restricted stock that have met all restrictions other than service conditions are treated as issued and carry dividend and voting rights; if the service conditions are not met, the shares of restricted stock are forfeited. At June 30, 2011 and September 30, 2010, shares of restricted stock of 0.4 million and 0.3 million