Segment and Market Information

We report our results in four segments: (1) Consumer Packaging, (2) Corrugated Packaging, (3) Merchandising Displays, and (4) Specialty Paperboard Products. See "Note 21. Segment Information" of the Notes to Consolidated Financial Statements.

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

                                                          Year Ended September 30,
                                                   2009             2008             2007
                                                                (In millions)
Net sales (aggregate):
Consumer Packaging                               $ 1,503.1        $ 1,551.4        $ 1,459.6
Corrugated Packaging                                 752.9            607.5            236.7
Merchandising Displays                               320.6            350.8            305.8
Specialty Paperboard Products                        306.9            392.9            361.7

Total                                            $ 2,883.5        $ 2,902.6        $ 2,363.8

Less net sales (intersegment):
Consumer Packaging                               $    25.1        $    18.1        $    15.0
Corrugated Packaging                                  37.3             31.1             22.7
Merchandising Displays                                 0.4              0.4                -
Specialty Paperboard Products                          8.4             14.1             10.3

Total                                            $    71.2        $    63.7        $    48.0

Net sales (unaffiliated customers):
Consumer Packaging                               $ 1,478.0        $ 1,533.3        $ 1,444.6
Corrugated Packaging                                 715.6            576.4            214.0
Merchandising Displays                               320.2            350.4            305.8
Specialty Paperboard Products                        298.5            378.8            351.4

Total                                            $ 2,812.3        $ 2,838.9        $ 2,315.8

Segment income:
Consumer Packaging                               $   228.3        $   119.8        $   125.2
Corrugated Packaging                                 178.9             71.3             18.9
Merchandising Displays                                31.9             41.9             38.8
Specialty Paperboard Products                         26.5             30.3             28.8

Total segment income                                 465.6            263.3            211.7
Restructuring and other costs, net                   (13.4 )          (15.6 )           (4.7 )
Non-allocated expenses                               (33.6 )          (29.3 )          (24.1 )
Interest expense                                     (96.7 )          (86.7 )          (49.8 )
Loss on extinguishment of debt and related
items                                                 (4.4 )           (1.9 )              -
Interest income and other income (expense),
net                                                      -              1.6             (1.3 )
Minority interest in income of consolidated
subsidiaries                                          (3.6 )           (5.3 )           (4.8 )

Income before income taxes                           313.9            126.1            127.0
Income tax expense                                   (91.6 )          (44.3 )          (45.3 )

Net income                                       $   222.3        $    81.8        $    81.7

Overview

On March 5, 2008, we acquired Southern Container, which owned the Solvay containerboard mill, eight integrated corrugated box plants, two sheet plants and four high impact graphics facilities. With the acquisition, RockTenn became one of the largest manufacturers of containerboard in North America, and continues as one of America's leading manufacturers of bleached and recycled paperboard with annual mill capacity of approximately 2.4 million tons. The acquisition added highly integrated low operating cost assets to our Corrugated Packaging segment. We have included the results of Southern Container's operations in our Corrugated Packaging segment in our financial statements since the March 2, 2008 effective date of the acquisition. We financed the acquisition with $1.2 billion of new senior secured credit facilities and $200 million of 9.25% senior notes due March 2016. See "Note 7. Acquisitions" and "Note 11. Debt", respectively, of the Notes to Consolidated Financial Statements section of the Financial Statements included herein.

Segment income for fiscal 2009 increased $202.3 million to $465.6 million compared to fiscal 2008 primarily due to increased earnings in our Corrugated Packaging segment as the Southern Container Acquisition contributed twelve months of earnings in fiscal 2009, compared to seven months of earnings in fiscal 2008, alternative fuel tax credits recorded in fiscal 2009 and comparatively lower recycled fiber and energy costs in fiscal 2009, which were partially offset by generally lower sales volumes. Our Consumer Packaging segment benefited from $54.1 million of alternative fuel tax credits, net of related expenses, for the period from January 22, 2009 to September 30, 2009. The tax credit is scheduled to expire on December 31, 2009; therefore, we expect to record an additional tax credit of approximately $21 million in the first quarter of fiscal 2010. See "Note 5. Alternative Fuel Tax Credit" of the Notes to Consolidated Financial Statements section of the Financial Statements included herein.

We incurred specific pre-tax charges related to the Southern Container Acquisition aggregating approximately $9 million and $27 million in fiscal 2009 and fiscal 2008, respectively. The specific pre-tax charges in fiscal 2009 consisted of a loss on extinguishment of debt and related items of $2.4 million related to amounts paid in excess of carrying value to redeem certain debt assumed in the acquisition, $3.3 million of integration costs and $3.5 million of deferred compensation expense funded into escrow through a purchase price reduction from Southern Container's stockholders. The pre-tax charges in fiscal 2008 consisted of $12.7 million of acquisition inventory step up expense, $3.0 million for an acquisition bridge financing fee, $1.9 million of loss on extinguishment of debt and related items associated with the acquisition, $4.6 million of integration costs and $5.0 million of deferred compensation expense funded into escrow through a purchase price reduction from Southern Container's stockholders. Net income increased $140.5 million to $222.3 million in fiscal 2009 largely due to the items discussed above.

Results of Operations

We provide below quarterly information to reflect trends in our results of operations. For additional discussion of quarterly information, see our quarterly reports on Form 10-Q filed with the SEC and "Note 22. Financial Results by Quarter (Unaudited)" of the Notes to Consolidated Financial Statements.

Net Sales (Unaffiliated Customers)

Net sales for fiscal 2009 were $2,812.3 million compared to $2,838.9 million in fiscal 2008. The decrease in net sales was primarily due to reduced sales volumes and lower recycled fiber selling prices which were largely offset by the Southern Container Acquisition, which contributed net sales of $569.4 million for twelve months of operations in fiscal 2009, compared to net sales of $375.9 million for seven months of operations in fiscal 2008, and increased selling prices in some of our segments.

Net sales for fiscal 2008 increased 22.6% to $2,838.9 million compared to $2,315.8 million in fiscal 2007 primarily due to the Southern Container Acquisition which contributed net sales of $375.9 million and increased volume and pricing across our segments.

Net Sales (Aggregate) - Consumer Packaging Segment



        First Quarter     Second Quarter     Third Quarter     Fourth Quarter     Fiscal Year
                                            (In millions)
2007   $         346.8   $          363.7   $         373.0   $          376.1   $     1,459.6
2008             374.7              394.8             388.9              393.0         1,551.4
2009             368.8              362.9             377.2              394.2         1,503.1

The 3.1% decrease in net sales before intersegment eliminations for the Consumer Packaging segment in fiscal 2009 compared to fiscal 2008 was primarily due to lower sales volumes, partially offset by higher selling prices. Coated recycled paperboard, bleached paperboard and market pulp tons shipped decreased 3.2%, 2.5% and 4.3%, respectively.

The 6.3% increase in net sales before intersegment eliminations for the Consumer Packaging segment in fiscal 2008 compared to fiscal 2007 was primarily due to higher sales of folding cartons due to increases in volume and prices and higher pricing across all coated paperboard grades. Coated recycled paperboard and bleached paperboard tons shipped increased 1.5% and 1.9%, respectively, and market pulp tons decreased 0.9%.

Net Sales (Aggregate) - Corrugated Packaging Segment



        First Quarter     Second Quarter     Third Quarter     Fourth Quarter     Fiscal Year
                                            (In millions)
2007   $          56.2   $           59.3   $          60.2   $           61.0   $       236.7
2008              61.4              112.0             208.9              225.2           607.5
2009             203.2              176.5             186.5              186.7           752.9

The 23.9% increase in Corrugated Packaging segment net sales before intersegment eliminations for fiscal 2009 compared to fiscal 2008 was primarily due to the Southern Container Acquisition, which contributed net sales of $569.4 million in fiscal 2009 compared with a contribution of $375.9 million in net sales in fiscal 2008. These increases were partially offset by reduced sales volumes.

The 156.7% increase in Corrugated Packaging segment net sales before intersegment eliminations for fiscal 2008 compared to fiscal 2007 was primarily due to the Southern Container Acquisition, which contributed net sales of $375.9 million, and increased sales prices in our legacy corrugated business. These net sales increases were partially offset by an increase in the number of tons that we shipped to a counterparty from which we buy inventory, which are not recorded as sales under generally accepted accounting principles in the United States ("GAAP") but are accounted for as an inventory swap transaction.

Net Sales (Aggregate) - Merchandising Displays Segment



        First Quarter     Second Quarter     Third Quarter     Fourth Quarter     Fiscal Year
                                            (In millions)
2007   $          60.9   $           82.6   $          76.8   $           85.5   $       305.8
2008              82.0               94.3              86.1               88.4           350.8
2009              74.8               82.9              79.7               83.2           320.6

Net sales for the Merchandising Displays segment decreased 8.6% in fiscal 2009 compared to fiscal 2008 primarily due to decreased demand for promotional displays.

The 14.7% increase in Merchandising Displays segment net sales before intersegment eliminations for fiscal 2008 compared to fiscal 2007 was primarily due to higher sales volumes on strong demand for promotional displays.

Net Sales (Aggregate) - Specialty Paperboard Products Segment



        First Quarter     Second Quarter     Third Quarter     Fourth Quarter     Fiscal Year
                                            (In millions)
2007   $          79.5   $           91.9   $          94.0   $           96.3   $       361.7
2008              91.8               99.8             102.1               99.2           392.9
2009              75.3               70.2              77.2               84.2           306.9

The 21.9% decrease in Specialty Paperboard Products segment net sales before intersegment eliminations in fiscal 2009 compared to fiscal 2008 was primarily due to reduced recycled fiber selling prices and lower sales volumes. Specialty recycled paperboard tons shipped decreased 10.9%.

The 8.6% increase in Specialty Paperboard Products segment net sales before intersegment eliminations in fiscal 2008 compared to fiscal 2007 was primarily due to higher sales volumes and pricing for recycled fiber, interior packaging products and specialty paperboard. Specialty recycled paperboard tons shipped increased 4.6%.

Cost of Goods Sold

Cost of goods sold decreased to $2,049.6 million in fiscal 2009 compared to $2,296.8 million in fiscal 2008. Cost of goods sold as a percentage of net sales decreased in fiscal 2009 compared to fiscal 2008 primarily related to a net alternative fuel tax credit of $54.1 million for the period from January 22, 2009 to September 30, 2009 and reduced recycled fiber and energy costs and the impact of an additional five months of higher margin Southern Container sales. Excluding the impact of Southern Container, recycled fiber and energy costs decreased $62 per ton and $26 per ton, respectively, and virgin fiber costs increased approximately $17 per ton, over the prior year. Additionally, excluding the impact of the Southern Container Acquisition, decreased freight expense due to cost reduction programs and lower sales volumes decreased cost of goods sold by $19.2 million. Partially offsetting these amounts, we experienced increased pension expense of $6.3 million and increased group insurance expense of $2.6 million, excluding the impact of the Southern Container Acquisition. Additionally, in fiscal 2008, acquisition accounting required us to step up the value of inventory acquired in the Southern Container Acquisition, which effectively eliminated the manufacturing profit that we would have realized upon sale of that inventory. This write up reduced our pre-tax income in fiscal 2008 by approximately $12.7 million as the acquired inventory was sold and charged to cost of sales.

Cost of goods sold increased to $2,296.8 million in fiscal 2008 compared to $1,870.2 million in fiscal 2007 primarily due to the incremental sales associated with the Southern Container Acquisition. Cost of goods sold as a percentage of sales was essentially flat in fiscal 2008 compared to fiscal 2007, 80.9% in fiscal 2008 and 80.8% in fiscal 2007, as rising input costs and the impact of the acquisition inventory step up expense offset higher pricing and the higher margin Southern Container sales included since the acquisition. Recycled fiber costs, excluding the Solvay mill, and virgin fiber costs increased approximately $23 per ton and $18 per ton, respectively, over the prior fiscal year. Energy and chemical costs at our recycled paperboard mills increased $12 per ton and $5 per ton, respectively, over the prior fiscal year. Excluding the impact of the Southern Container Acquisition, in fiscal 2008 we experienced increased energy costs of approximately $22.0 million, increased freight expense of $8.5 million, increased workers' compensation expense of $3.0 million and increased group insurance expense of $1.4 million across our operations. We also experienced higher costs associated with our Dallas mill due to a dryer section failure and rebuild in December 2007. Partially offsetting these amounts, in fiscal 2008, we received approximately $1.7 million in recovery of previously expensed environmental remediation costs and incurred reduced pension expense of $4.7 million. We have foreign currency transaction risk primarily due to our operations in Canada. See "Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency" below. The impact of foreign currency transactions in fiscal 2008 compared to fiscal 2007 decreased costs of goods sold by $1.6 million.

We value the majority 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.

The following table illustrates the comparative effect of LIFO and FIFO accounting on our results of operations. This supplemental FIFO earnings information reflects the after-tax effect of eliminating the LIFO adjustment each year.

                              Fiscal 2009             Fiscal 2008             Fiscal 2007
                           LIFO        FIFO        LIFO        FIFO        LIFO        FIFO
                                                     (In millions)
    Cost of goods sold   $ 2,049.6   $ 2,057.8   $ 2,296.8   $ 2,287.0   $ 1,870.2   $ 1,863.4
    Net income               222.3       217.2        81.8        88.0        81.7        86.0

Net income in fiscal 2009 is higher under the LIFO method because we experienced a period of declining costs, and net income in fiscal 2008 and 2007 is lower under the LIFO method because we experienced periods of rising costs.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses increased $20.3 million to $330.8 million in fiscal 2009 compared to $310.5 million in fiscal 2008 due primarily to the additional five months of SG&A expense associated with the Southern Container Acquisition in fiscal 2009. SG&A increased as a percentage of net sales due largely to lower fiscal 2009 net sales associated with lower sales volumes and reduced recycled fiber selling prices, which more than offset the additional five months of net sales associated with the Southern Container Acquisition. Excluding the impact of the Southern Container Acquisition, SG&A expenses in fiscal 2009 were $9.6 million lower than fiscal 2008. We experienced increased aggregate pension expense of $4.3 million, increased stock based compensation expense of $2.2 million, and increased group insurance expense of $1.0 million, excluding the impact of the Southern Container Acquisition. Partially offsetting these amounts, we incurred reduced consulting and outside services for various projects of $4.3 million, commissions expense of $1.7 million due to lower sales volumes, decreased travel and entertainment expense of $1.2 million and reduced bonus expense of $1.1 million, excluding the impact of the Southern Container Acquisition.

SG&A expenses increased $51.4 million to $310.5 million in fiscal 2008 compared to $259.1 million in fiscal 2007 primarily due to SG&A expenses associated with the Southern Container Acquisition. SG&A expenses as a percentage of net sales decreased to 10.9% in fiscal 2008 from 11.2% in fiscal 2007 primarily due to increased net sales from higher sales volumes and prices. Excluding the impact of the Southern Container Acquisition, SG&A labor costs increased $5.7 million, commissions expense increased $2.7 million on increased sales, stock based compensation expense increased $1.9 million, and bad debt expense increased $1.5 million. These increases were partially offset by reduced bonus expense of $2.4 million and reduced pension expense of $1.2 million.

Acquisitions

On March 5, 2008, we acquired the stock of Southern Container for $1,059.9 million, net of cash received of $54.0 million, including expenses. RockTenn and Southern Container made an election under section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code") that increased RockTenn's tax basis in the acquired assets and is expected to result in a net present value benefit of approximately $135 million, net of an agreed upon payment included in the purchase price for the election to the sellers of approximately $68.6 million paid to Southern Container's former stockholders in November 2008. In fiscal 2008, we incurred $26.8 million of

debt issuance costs in connection with the transaction. We recorded fair values for acquired assets and liabilities including $374.3 million of goodwill and $108.7 million of intangibles. See "Note 7. Acquisitions" and "Note 11. Debt", respectively, of the Notes to Consolidated Financial Statements section of the Financial Statements included herein.

On January 24, 2007, we acquired, for $32.0 million, the remaining 40% minority interest in Fold-Pak, LLC ("Fold-Pak", formerly known as GSD Packaging, LLC), giving us sole ownership. These operations are included in the results of our Consumer Packaging segment. We acquired our initial 60% interest in Fold-Pak in connection with the GSPP Acquisition in June 2005. Fold-Pak makes paperboard-based food containers serving a very broad customer base and is a consumer of board from our bleached paperboard mill.

For additional information, including the opening balance sheet and pro forma information reflecting the Southern Container Acquisition, see "Note 7. Acquisitions" of the Notes to Consolidated Financial Statements.

Restructuring and Other Costs, Net

We recorded pre-tax restructuring and other costs, net of $13.4 million, $15.6 million, and $4.7 million for fiscal 2009, 2008, and 2007, respectively. These amounts are not comparable since the timing and scope of the individual actions associated with a restructuring can vary. In most instances when we close a facility we transfer a substantial portion of the facility's assets and production to other facilities. We recognize, if necessary, an impairment charge, primarily to reduce the carrying value of equipment or other property to their estimated fair value or 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. We generally expect the integration of the closed facility's assets and production to enable the receiving facilities to better leverage their fixed costs while eliminating fixed costs from the closed facility. For additional information, see "Note 8. Restructuring and Other Costs, Net" of the Notes to Consolidated Financial Statements.

Paperboard Tons Shipped and Average Price (in thousands, except Average Price Per Ton)

The table below includes coated recycled paperboard, bleached paperboard and market pulp tons shipped in our Consumer Packaging segment, containerboard tons shipped from our two containerboard mills in our Corrugated Packaging segment, as well as the tons shipped from our specialty recycled mills in our Specialty Paperboard Products segment and the average price per ton of the aggregated group. The decrease in average price per ton in the second quarter of fiscal 2008 is due to the higher percentage of lower priced containerboard included in the average subsequent to the Southern Container Acquisition.

                     Coated and
                      Specialty
                      Recycled      Bleached    Market                       Average
                     Paperboard    Paperboard    Pulp     Containerboard      Price
                        Tons          Tons       Tons          Tons         (Per Ton)
                     Shipped (a)    Shipped     Shipped    Shipped (b)       (a)(c)
                               (In thousands, except Average Price Per Ton)
    First Quarter          221.5         74.0      20.9             44.6   $       558
    Second Quarter         223.0         82.2      24.6             46.2           571
    Third Quarter          225.1         90.1      25.6             45.3           588
    Fourth Quarter         223.5         88.7      24.8             46.8           596

    Fiscal 2007            893.1        335.0      95.9            182.9   $       578


    First Quarter          217.1         79.6      21.2             44.7   $       599
    Second Quarter         229.0         84.9      27.8            102.1           587
    Third Quarter          235.9         86.3      24.5            218.5           566
    Fourth Quarter         234.2         90.7      21.5            244.1           585

    Fiscal 2008            916.2        341.5      95.0            609.4   $       583


    First Quarter          204.9         86.3      20.7            221.9   $       596
    Second Quarter         212.0         78.3      19.5            188.6           586
    Third Quarter          219.8         79.4      24.2            203.0           564
    Fourth Quarter         224.3         88.9      26.5            235.2           557

    Fiscal 2009            861.0        332.9      90.9            848.7   $       575

(a) Recycled Paperboard Tons Shipped and Average Price Per Ton include gypsum paperboard liner tons shipped by Seven Hills.

(b) Containerboard Tons Shipped includes corrugated medium and linerboard, which include the Solvay mill tons beginning in March 2008.

(c) Beginning in the second quarter of fiscal 2008, Average Price Per Ton includes coated and specialty recycled paperboard, containerboard, bleached paperboard and market pulp.

Segment Income

Segment Income - Consumer Packaging Segment



                                   Net Sales        Segment     Return
                                  (Aggregate)        Income    on Sales
                                   (In millions, except percentages)
               First Quarter    $          346.8    $   24.3        7.0 %
               Second Quarter              363.7        29.7        8.2
               Third Quarter               373.0        36.9        9.9
               Fourth Quarter              376.1        34.3        9.1

               Fiscal 2007      $        1,459.6    $  125.2        8.6 %


               First Quarter    $          374.7    $   28.7        7.7 %
. . .