Rock-Tenn Beats on Q3 Earnings, Shares Fall on Y/Y Decline

Zacks

Shares of  Rock-Tenn Company (RKT) fell nearly 3% and closed at $97.95 on Aug 5, after the company reported third-quarter fiscal 2014 (ended Jun 30, 2014) results on Jul 29. Adjusted earnings declined around 9% year over year to $1.97 per share. However, the reported figure came in ahead of the Zacks Consensus Estimate of $1.79.

Restructuring and other costs as well as operating losses and transition costs due to plant closures were 13 cents per share in the current quarter and 25 cents per share in the year-ago quarter. Notably, the reported quarter figure excluded an acquisition inventory step-up cost of 2 cents per share. Including these one-time items, earnings per share in fiscal third-quarter 2014 went down 4.7% to $1.82 from $1.91 in the prior-year quarter.

Total revenues increased 3.4% year over year to $2,531 million, surpassing the Zacks Consensus Estimate of $2,517 million.

Operating Performance

On a year-over-year basis, cost of goods sold went up 4.6% to $2,041 million. Gross profit fell 1.4% year over year to $489.6 million. Gross margin contracted 100 basis points (bps) to 19.3%.

Selling, general and administrative expenses rose to $245.3 million from $243.9 million in the prior-year quarter. Adjusted operating income decreased 3.4% year over year to $244 million. Consequently, operating margin decreased 60 bps to 9.7%.

Segmental Performance

Corrugated Packaging: Net sales in the segment rose 3% year over year to $1,774 million in the quarter primarily driven by the Tacoma Mill acquisition and higher selling prices, partly offset by higher commodity and other costs. Operating income however went down 8% year over year to $180 million.

Consumer Packaging: The segment’s net sales went up 3.1% year over year to $497 million due to higher selling prices. Operating income rose slightly to $59.6 million from $59.1 million in the year-ago quarter.

Merchandising Displays Segment: The segment reported sales of $225 million, up 35.3% from the year-ago quarter due to higher volumes and the impact of a specialty display acquisition. Operating income improved 24.4% year over year to $21 million, driven by higher volumes, partially offset by higher commodity and other items.

Recycling: Net sales in the segment declined 31% year over year to $85.4 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 $2.1 million, compared with $2 million in the year-ago quarter. The flat income was due to the impact of lower volumes and market conditions, partially offset by cost structure improvements.

Financial Position

Rock-Tenn ended the fiscal third quarter with cash and cash equivalents of $40 million, up from $36.4 million as of Sep 30, 2013. Long-term debt was $2,923.3 million as of Jun 30, 2014, compared with $2,841.9 million as of Sep 30, 2013. The debt-to-capitalization ratio was 39.8% as of Jun 30, 2014, flat as of Sep 30, 2013.

Cash flow from operating activities in the reported quarter was $218 million compared with $270 million in the year-ago period. The company repurchased 206,000 shares in the quarter for approximately $21 million. Additionally, Rock-Tenn invested $151 million in capital expenditures, paid dividends of $25 million and repurchased $21 million of common stock during the quarter.

On Jul 28, Rock-Tenn announced a two-for-one stock split that will increase outstanding shares to approximately 143 million. The split will take effect on Aug 27. The fiscal fourth quarter adjusted earnings per share and full year cash flow guidance will reflect the stock split.

Shipment

Shipments at the Corrugated Packaging segment of 1,962,000 tons increased around 2.1% or 40,000 tons from the year-ago quarter. However, the Consumer Packaging segment’s paperboard and pulp shipments decreased about 0.5% or 2,000 tons year over year to 394,000 tons.

Guidance

Taking into account the two-for-one stock split, Rock-Tenn guided fiscal fourth quarter adjusted earnings in the range of $1 to $1.10 per share. The company expects to generate free cash flow of over $1.70 per share in the fiscal fourth quarter and $6 per share in fiscal 2014, both reflecting the stock split.

Further, Rock-Tenn expects fiscal 2014 capital expenditures of $575 million, slightly higher than the previous guidance of $550 million, reflecting the Tacoma acquisition and other items.

Our Take

For the fiscal fourth quarter, Rock-Tenn expects the recovered fiber market to experience a moderate rise in pricing. Moreover, the company’s investment in box plants, the installation of new standard corrugated box operating system and increase in domestic and export pricing will likely boost profitability. The company’s strong balance sheet and cash flow will also help in returning capital to shareholders through dividends and stock repurchases.

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 #4 (Sell).

Stocks with a favorable Zacks Rank in the paper and packaging industry include Mercer International Inc. (MERC), Rexam plc (REXMY) and Sappi Limited (SPPJY). All these stocks have a Zacks Rank #2 (Buy).

Read the Full Research Report on REXMY
Read the Full Research Report on RKT
Read the Full Research Report on SPPJY
Read the Full Research Report on MERC


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