Rock-Tenn cuts debt, leverage ratio in fiscal Q2, anticipates $1 billion of availability

By Paul Deckelman

New York, April 27 - Rock-Tenn Co. continued to use its strong operating cash flow during the fiscal second quarter ended March 31 to reduce its net debt level by $45.9 million, company executives said Wednesday - bringing the key measure of debt-reduction progress to under $1 billion for the first time since a massive debt addition to fund a big acquisition three years ago.

The reduction since then in net debt and the accompanying slide in its leverage ratio of net debt versus EBITDA comes against a backdrop of continued strong earnings for the Norcross, Ga.-based maker of packaging materials such as paperboard and corrugated cardboard.

Rock-Tenn reported Wednesday that earnings for the quarter rose nearly 13% from a year earlier, to $37 million, or 92 cents per share, on sales of $792.9 million; in the year-ago quarter, the company earned $32.8 million, or 83 cents per share, on $731.9 million of sales.

While sales exceeded Wall Street expectations of under $790 million, per-share earnings missed estimates of around $1.25 per share due to an increase in the company's cost of goods sold, driven largely by rising energy prices.

Net debt on downward path

Rock-Tenn's executive vice president and chief financial officer, Steven C. Voorhees, told analysts on a conference call following the release of the results that during the three years since the company's $1.06 billion acquisition of Southern Container Corp., which closed in the spring of 2008, it has reduced its net debt by $771 million, from more than $1.7 billion to $999.6 million currently.

Accordingly, the company's leverage ratio has declined to 1.95x at the end of March this year from 4.2x in March 2008.

With the acquisition helping to boost cash-flow generation, the ratio - which had ballooned above 4.0x on the $1 billion of new borrowings needed to swing the Southern Container deal - had come down to 3.3x by March 2009, a year after the deal closed, and then to 2.4x by March 2010. It continued to decline, to 2.3x at the end of the 2010 fiscal year on Sept. 30, and down to its current level.

Voorhees said that interest expense during the quarter came to $16.2 million - $3 million less than the year-earlier quarter, primarily due to the company's $180 million reduction in its average debt outstanding from a year earlier.

Smurfit-Stone deal funded

The CFO said that the company had $549 million of borrowing availability under its credit facilities as of the end of March, although that is expected to nearly double as a result of recent financing transactions undertaken in the wake of Rock-Tenn's pending $3.5 billion acquisition of sector peer Smurfit-Stone Container Corp.

That deal, announced Jan. 23, is expected to close during the current fiscal third quarter. Rock-Tenn will acquire Smurfit-Stone for $1.8 billion in cash and 30.9 million shares of common stock, the equivalent of $35 per share, and will also assume $700 million of Smurfit-Stone net debt and the Chicago-based containerboard manufacturer's $1.1 billion of pension liabilities.

Voorhees said that Rock-Tenn had completed the $3.7 billion of financing needed to close the Smurfit- Stone acquisition. The original commitment from lenders Wells Fargo Bank NA, Rabobank, SunTrust Bank, Bank of America Merrill Lynch and JPMorgan included nearly $2.5 billion for the combined five-year revolving credit and term loan A facilities and a $1.25 billion seven-year term loan B piece.

But based on what he termed "strong market demand," Rock-Tenn was able to upsize the revolver and term loan A facilities by $500 million, to $2.95 billion, with the two facilities initially priced at 200 basis points over Libor, with no floor. The revolver, originally sized at $1.2 billion, was increased to $1.475 billion, while the $1.25 billion term loan A portion was also raised to $1.475 billion.

At the same time, the company was thus able to downsize the more expensive (Libor plus 275 bps, with a 75 bps floor) term loan B facility by $500 million, to $750 million.

Voorhees said that Rock-Tenn had also received commitments for an expanded receivables securitization facility, with initial availability of about $600 million. The facility is priced in the area of Libor plus 115 bps.

The CFO said that with those financings in place, Rock-Tenn expects to have about $1 billion of availability after the Smurfit-Stone transaction closes.

No plans for bond deal

In its most recent 10-Q filing with the Securities and Exchange Commission on Feb. 3, after the release of the company's numbers for the fiscal first quarter ended Dec. 31, 2010, Rock-Tenn's balance sheet showed total debt of $1.057 billion, including $155.5 million of 8.2% secured notes slated to come due this August, $81 million of 5 5/8% secured notes due 2013 and $299.1 million of 9¼% unsecured notes due 2016.

During the question-and-answer portion of the conference call following the company's presentation, Voorhees was asked by an analyst whether Rock-Tenn plans to tap the bond market once the Smurfit-Stone acquisition closes in order to refinance its bank debt, or whether it will just leave that debt in place and continue to pay it down using free cash flow.

The CFO said that while the company has looked at options for terming out that debt, it currently has no plans to do so.

"We're generating, under our models, a significant amount of free cash flow, reducing that debt really pretty rapidly, so in the short term, we don't have any plans" to do another bond deal, Voorhees declared, "but we'll continue to evaluate that as we look at pricing in the market and opportunities."

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