Rock-Tenn Falls on Earnings Miss - Analyst Blog

Shares of Rock-Tenn Company RKT fell around 2.5% and closed at $96.27 on Apr 29, after the company reported second-quarter fiscal 2014 (ended Mar 31, 2013) results on Apr 28. Adjusted earnings improved 13% year over year to $1.27 per share. However, the reported figure fell short of the Zacks Consensus Estimate of $1.58.

Restructuring and other costs as well as operating losses and transition costs due to plant closures were was 14 cents per share for both the reported quarter and year-ago quarter. Notably, the prior-year quarter figure excluded an alternative fuel mixture credit tax reserve adjustment of $3.47 per share. Including this, earnings per share EPS in second-quarter 2014 slumped around 74.6% to $1.13 from $4.45 in the prior-year quarter.

Total revenue increased 3% year over year to $2,394 million but lagged the Zacks Consensus Estimate of $2,422 million.

Operating Performance

On a year-over-year basis, cost of goods sold went up 1.4% to $1,966 million. Gross profit rose 10% year over year to $427 million. Gross margin expanded 130 basis points (bps) to 17.9%.

Selling, general and administrative expenses increased 3.4% year over year to $245.5 million. Adjusted operating income surged 22.9% to $181.7 million. Consequently, operating margin increased 120 bps to 7.6%.

Segmental Performance

Corrugated Packaging: Net sales in the segment rose 2.7% year over year to $1.6 billion in the quarter. Operating income increased 23.7% year over year to $133 million. Results were aided by higher selling prices, partially offset by lower volumes and higher commodity and other costs.

Consumer Packaging: The segment's net sales went up 4.5% year over year to $489.3 million due to higher selling prices and volumes. Operating income declined to $49.3 million from $50.5 million in the year-ago quarter owing to rise in commodity costs and the cost of other items.

Merchandising Displays Segment: The segment reported sales of $213 million, up 31% from the year-ago quarter. Operating income improved 33.9% year over year to $17 million, driven by higher volumes.

Recycling: Net sales in the segment declined 31% year over year to $90 million due to lower volumes from soft export markets for recovered fiber, along with several collection facility closures. The segment reported an operating income of $2.8 million, down from $3.5 million in the year-ago quarter. The decrease resulted from lower volumes.

Financial Position

As of Mar 31, 2014, cash and cash equivalents amounted to $32.2 million versus $36.4 million as of Sep 30, 2013. Long-term debt was $2,634.8 million as of Mar 31, 2014, compared with $2,841.9 million as of Sep 30, 2013. The debt-to-capitalization ratio contracted 200 bps to 37.7% as of Mar 31, 2014, from 39.7% as of Sep 30, 2013. The company has also reduced its leverage ratio from 1.84x to 1.75x.

Cash from operations was $226.6 million as of Mar 31, 2014, up 29% from $175.1 million as of Mar 31, 2013. The company generated strong free cash flow of over $170 million in the quarter, up 40% year over year. Rock-Tenn paid dividends of $25 million in the quarter.

Shipment

Shipments at the Corrugated Packaging segment of 1,810,000 tons declined around 2.7% or 50,000 tons from the year-ago quarter due to lower customer demand for containerboard and corrugated containers. However, the Consumer Packaging segment's paperboard and pulp shipments increased about 1.6% or 6,000 tons year over year, including the impact of the maintenance outage at Demopolis, AL bleached paperboard mill.

Our Take

Rock-Tenn's strong earnings growth reflects continued improvement in its operating performance. The company's strong balance sheet and cash flow will help in returning capital to shareholders through dividends and stock repurchases.

For the rest of the fiscal year, Rock-Tenn expects the recovered fiber market to experience a moderate rise in pricing that bodes well. Moreover, the company's investment in box plants, installation of new standard corrugated box operating system and increase in domestic and export pricing will likely boost profitability.

Norcross, GA-based Rock-Tenn is one of the major integrated manufacturers of corrugated and consumer packaging as well as recycling solutions in North America. It operates in the U.S., Canada, Mexico, Chile, Argentina and China.

Currently, Rock-Tenn has a Zacks Rank #3 (Hold).

Stocks with a more favorable Zacks Rank in the paper and packaging industry include Crown Holdings Inc. CCK, KapStone Paper and Packaging Corp. KS and Graphic Packaging Holding Co. GPK. While Crown Holdings sports a Zacks Rank #1 (Strong Buy), KapStone and Graphic Packaging have a Zacks Rank #2 (Buy).