UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

For the transition period from _____ to _____

Commission File Number 0-23340

Rock-Tenn Company

Registrant’s telephone number, including area code: (770) 448-2193

N/A

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 x    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes x    No o

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

ROCK-TENN COMPANY

INDEX

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

ROCK-TENN COMPANY

See Accompanying Notes to Condensed Consolidated Financial Statements

ROCK-TENN COMPANY

See Accompanying Notes to Condensed Consolidated Financial Statements

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ROCK-TENN COMPANY

See Accompanying Notes to Condensed Consolidated Financial Statements

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ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(In Thousands)

Supplemental schedule of non-cash investing and financing activities:

In the first six months of fiscal 2004, we paid $1,094, primarily for additional consideration due to the August 2003 acquisition of PCPC, Inc., d/b/a Pacific Coast Packaging Corp. (which we refer to as “Pacific Coast Packaging”). The payment represented an adjustment based on the achievement of certain sales levels for the six-month period following the closing of the transaction and was recorded as goodwill. In the first six months of fiscal 2003, the Company paid $65,220 for the purchase of Groupe Cartem Wilco Inc. (which we refer to as “Cartem Wilco”). In conjunction with the acquisitions, liabilities were assumed as follows:

See Accompanying Notes to Condensed Consolidated Financial Statements

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ROCK-TENN COMPANY

Unless the context otherwise requires, “we,” “us,” “our” or “the Company” refers to the business of Rock-Tenn Company and its subsidiaries, including RTS Packaging, LLC, which we refer to as “RTS,” and Seven Hills Paperboard, LLC, which we refer to as “Seven Hills.” We own 65% of RTS and conduct our interior packaging products business through RTS. We own 49% of Seven Hills, a manufacturer of gypsum plasterboard liner, which we do not consolidate for purposes of our financial statements.

Note 1.    Interim Financial Statements

The accompanying condensed consolidated financial statements of the Company have not been audited by independent auditors. The condensed consolidated balance sheet at September 30, 2003 has been derived 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 the results of operations for the three and six month periods ended March 31, 2004 and 2003, the Company’s financial position at March 31, 2004 and September 30, 2003, and the cash flows for the six month periods ended March 31, 2004 and 2003.

Certain notes and other information have been condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003 (the “Fiscal 2003 Form 10-K”).

The results for the three and six months ended March 31, 2004 are not necessarily indicative of results that may be expected for the full year.

Certain reclassifications have been made to prior year amounts to conform with the current year presentation.

Note 2.    New Accounting Standards

In December 2003, the Financial Accounting Standards Board (which we refer to as the “FASB”) released revised FASB Statement
No. 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits (which we refer to as “SFAS 132R”). We adopted this standard as of January 1, 2004. SFAS 132R requires additional disclosures to those required in the original SFAS 132 about the assets, obligations, cash flows and net periodic benefit costs of defined benefit pension plans and other defined benefit postretirement plans, including new disclosures in interim financial reports. We have included the new interim disclosures in Note 12 to the Condensed Consolidated Financial Statements. The adoption of SFAS 132R did not have a material effect on our consolidated financial statements.

In December 2003, the FASB issued revised FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, an Interpretation of ARB 51 (which we refer to as “FIN 46R”). We adopted this interpretation on March 31, 2004 for any variable interest entities (which we refer to as “VIEs”) in which we hold a variable interest that we acquired before February 1, 2003. We have not acquired any variable interests since that date. The only VIE in which we believe we hold a variable interest in is discussed in Note 3 to the Condensed Consolidated Financial Statements under the heading “Investment in Corporate Joint Venture.”

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Note 3.    Summary of Significant Accounting Policies

The following significant accounting policies have been revised since we filed our Fiscal 2003 Form 10-K to more clearly reflect our accounting for these items. Except for our adoption of FIN 46R, none of these changes represent a change in accounting principle or policy.

     Investment in Corporate Joint Venture

During 2000, the Company formed a joint venture (“Seven Hills” or the “Joint Venture”) with Lafarge North America, Inc. (“Lafarge”). The Company contributed cash and a paper machine located at its Lynchburg, Virginia paper mill. Lafarge contributed cash. Subsequent to inception the Company and Lafarge have made additional cash contributions. The Company has invested a total of $22.9 million in Seven Hills as of March 31, 2004. The Company uses the equity method to account for its 49% investment in Seven Hills. Under the equity method, the Company’s investment was initially recorded at cost, then subsequently reduced by distributions and increased or decreased by the Company’s proportionate share of the Joint Venture’s net earnings or loss. Funding of net losses is guaranteed by the partners of the joint venture in relation to their proportionate share of ownership. Under the terms of the Seven Hills joint venture arrangement, Lafarge is required to purchase all of the gypsum plasterboard liner produced by Seven Hills. Seven Hills is managed by a Managing Board that has equal representation by Lafarge and the Company. The Company provides all labor, supervision, management, executive and administrative services necessary to operate Seven Hills and leases the land and building occupied by Seven Hills. Our share of cumulative losses as of March 31, 2004 and 2003 are $1.8 million and $1.6 million, respectively. Under the terms of the joint venture agreement, Lafarge has the option to put, at an amount determined by a formula, its interest in the Joint Venture to the Company at any time after the expiration of six years from March 29, 2001, the date that the Joint Venture’s paper machine was converted to produce gypsum plasterboard liner. Upon the adoption of FIN 46R on March 31, 2004 (see Note 2 above), the Company determined the Joint Venture is a VIE, but the Company is not its primary beneficiary. Accordingly, we will continue to account for Seven Hills using the equity method.

     Revenue Recognition

We recognize revenue when all of the following criteria, which are detailed in Codification of Staff Accounting Bulletins, Topic 13:A.1, Revenue Recognition-General, are met:

•		Persuasive evidence that an arrangement exists.
•		Delivery has occurred or services have been rendered.
•		The seller’s price to the buyer is fixed or determinable.
•		Collectibility is reasonably assured.

Items that we net against our gross revenue include provisions for discounts, returns, allowances, customer rebates, outbound freight billed to customers and other adjustments. We account for such provisions during the same period in which we record the related revenues, except for changes in the fair value of derivatives, which we recognize as described below, and expense for cash discounts are recorded as earned when payments are received from our customers.

     Derivatives

The Company enters into a variety of derivative transactions. The Company uses swap agreements to manage the interest rate characteristics of a portion of its outstanding debt. The Company uses forward contracts to limit exposure to fluctuations in Canadian foreign currency rates with respect to its receivables denominated in Canadian dollars. The Company also uses commodity swap agreements to limit exposure to falling sales prices and rising raw material costs. The Company is exposed to counterparty credit risk for nonperformance and, in the event of nonperformance, to market risk for changes in interest rates. The Company manages exposure to counterparty credit risk through minimum credit standards, diversification of counterparties and procedures to monitor concentrations of credit risk.

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For each derivative instrument that is designated and qualifies as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of the changes in fair values. For each derivative instrument that is designated and qualifies as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the hedge is recognized in current earnings during the period of change. Gains or losses on the termination of interest rate swap agreements are deferred and amortized as an adjustment to interest expense of the related debt instrument over the remaining term of the original contract life of the terminated swap agreements. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change. The fair value of the Company’s derivative instruments are based on market quotes and represents the net amount required to terminate the position, taking into consideration market rates and counterparty credit risk. Derivative contracts that are an asset from the Company’s perspective are reported as other assets. Contracts that are liabilities from the Company’s perspective are recorded as other liabilities.

Note 4.    Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and the differences could be material.

The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates associated with its evaluation of the recoverability of goodwill and property, plant and equipment as well as those used in the determination of taxation, insurance and restructuring. In addition, significant estimates form the basis for the Company’s reserves with respect to collectibility of accounts receivable, inventory valuations, pension benefits, and certain benefits provided to current employees. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate.

Note 5.    Comprehensive Income

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

The change in other comprehensive income is primarily due to the fluctuation in the Canadian/U.S. exchange rate and an increase in our overall investment in Canada as a result of our acquisition of Cartem Wilco in January 2003. The second quarter of fiscal 2004 was impacted as the exchange rate moved to 1.3111 at March 31, 2004 from 1.2963 at December 31, 2003. The second quarter of fiscal 2003 was impacted as the exchange rate moved to 1.4699 at March 31, 2003 from 1.5723 at December 31, 2003.

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The six months ended March 31, 2004 was impacted as the exchange rate moved to 1.3111 at March 31, 2004 from 1.3493 at September 30, 2003. The six months ended March 31, 2003 was impacted as the exchange rate moved to 1.4699 at March 31, 2003 from 1.5870 at September 30, 2002.

Note 6.    Earnings per Share

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

Note 7.    Restructuring and Other Costs

We recorded pre-tax restructuring and other costs of $6.0 million and $6.2 million for the second quarter of fiscal 2004 and the six months ending March 31, 2004, respectively. We recorded pre-tax charges of $0.9 million and $0.4 million for the second quarter of fiscal 2003 and the six months ending March 31, 2003, respectively. These charges are discussed below.

During the second quarter of fiscal 2004, we announced the closure of our Wright City, Missouri laminated paperboard facility effective March 31, 2004 and recorded a pre-tax charge of $7.7 million. The charge consisted of an asset impairment charge of $6.5 million to record the equipment and facility at their estimated fair value less cost to sell, a goodwill impairment charge of $0.2 million, severance and other employee costs of $0.4 million, inventory write-off of $0.4 million, and other costs of $0.2 million. The closure resulted in the termination of approximately 68 employees. Net sales at the facility for the six-month period ended March 31, 2004 and March 31, 2003 were $5.1 million and $6.7 million, respectively. Operating losses at the facility for the same six-month periods were $1.6 million and $1.9 million, respectively. We do not anticipate consolidating the majority of the sales of this operation into our remaining laminated facilities. We also sold our previously closed Mundelein, Illinois merchandising display facility site for a pre-tax gain of $1.8 million. In addition, we recorded a variety of charges from previously announced closures totaling $0.1 million in the period.

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During the six months ended March 31, 2004, we recorded a pre-tax charge of $7.7 million for the closure of our Wright City facility, recorded a $1.8 million pre-tax gain on the sale of our Mundelein facility, and incurred a variety of charges from previously announced closures totaling $0.3 million. The charges from the previously announced closings consisted primarily of $0.1 million for equipment relocation, $0.1 million for inventory write-off, and $0.1 million of carrying costs.

The following table represents a summary of the restructuring accrual as well as a reconciliation of the restructuring accrual to the line item "Restructuring and other costs” on the condensed consolidated statements of income for the six months ended March 31, 2004 (in thousands):