Rock-Tenn (RKT) Rises on Q1 Earnings Beat, Merger News - Analyst Blog

Rock-Tenn Company’s (RKT) shares gained over 6% after the company reported improved first-quarter fiscal 2015 (ended Dec 31, 2014) results and announced that it has agreed to merge with MeadWestvaco Corp. (MWV) to form a global giant of consumer and corrugated packaging.

Shares of Rock-Tenn hit a new 52-week high of $70.35 on Jan 26, 2015 and eventually closed at $66.85.

Rock-Tenn’s adjusted earnings in the first quarter increased 15.7% to 96 cents per share from 83 cents in the year-ago quarter and also surpassed the Zacks Consensus Estimate of 90 cents a share.

Including restructuring and other costs as well as pension lump sum settlement expenses, earnings per share in first-quarter fiscal 2015 went up 17% to 88 cents from 75 cents in the prior-year quarter.

Total revenue increased 6.4% year over year to $2.51 billion, beating the Zacks Consensus Estimate of $2.46 billion. The improvement came on the back of the Tacoma Mill and display acquisitions completed in fiscal 2014 and higher corrugated and folding carton volumes.

Rock-Tenn Company - Earnings Surprise | FindTheBest

Operating Performance

On a year-over-year basis, cost of goods sold went up 6.8% to $2.04 billion. Gross profit increased 4.8% year over year to $469.5 million. Gross margin contracted 30 basis points (bps) to 18.7%.

Selling, general and administrative expenses increased to $243.7 million compared with $234.8 million in the prior-year quarter. Segment income increased 4% year over year to $244 million. Productivity improvements and income from the acquisitions were partially offset by increased commodity and other costs across the business. Operating margin contracted 20 basis points to 9.7%.

Segmental Performance

Corrugated Packaging: Net sales in the segment rose 7% year over year to $1.77 billion in the quarter primarily driven by the Tacoma Mill acquisition and increased corrugated segment shipments. Operating income also went up 16% year over year to $183 million, due to higher volumes from the acquisition and increased exports along with productivity improvements and the impact of lower commodity and other costs.

Consumer Packaging: The segment’s net sales went up 1.4% year over year to $478.8 million due to higher selling prices as well as volumes. Operating income, however, declined 8.7% to $52.6 million from $57.6 million in the year-ago quarter. Increased net sales were partially offset by the impact of higher commodity costs and other items.

Merchandising Displays Segment: The segment reported sales of $238 million, increasing 29% from the year-ago quarter, due to higher volumes from two display acquisitions. Operating income dipped more than three-fold year over year to $6.4 million as costs associated with supporting new business and acquisition inventory step-up expense offset the benefit from higher volumes.

Recycling: Net sales in the segment declined 19.4% year over year to $80 million due to lower recovered fiber prices as a result of weak global markets. However, the segment reported operating income of $1.8 million, improving significantly from $0.1 million in the year-ago quarter, led by higher volumes and cost structure improvements.

Financial Position

Rock-Tenn reported cash and cash equivalents of $32.8 million at the end of first-quarter fiscal 2015 versus $32.6 million in the previous quarter. The company generated $332.4 million in cash from operating activities during the quarter compared with $304.5 million in the prior-year quarter.

Long-term debt was $2.68 billion as of Dec 31, 2014, compared with $2.85 billion as of Sep 30, 2014. During the quarter, Rock-Tenn returned approximately $35 million to its shareholders as dividends and share repurchases.

Shipment

During the first quarter, shipments of 1,996,000 tons at the Corrugated Packaging segment increased around 10.6% from the year-ago quarter mainly driven by acquisition. However, the Consumer Packaging segment’s shipments decreased about 1.8% year over year to 371,000 tons due to pulp inventoried for next quarter's planned major maintenance outage.

Rock-Tenn and MeadWestvaco Deal

On Jan 26, Rock-Tenn and MeadWestvaco entered into a definitive merger agreement, which will form a new company worth $16 billion. The merger will create the second-largest U.S. packaging company, trailing only International Paper Company (IP), which has a market capitalization of nearly $23 billion.

The transaction has been approved by both companies’ board of directors and shareholders are expected to vote on favor of the proposed merger. The deal is also subject to receipt of certain regulatory approvals and other customary closing conditions. The companies expect the deal to be completed by the end of the second quarter of this year and the name for the new company will be announced prior to the completion of the deal.

Per the agreement, MeadWestvaco holders will receive 0.78 shares of the new company for each share held, while Rock-Tenn holders can elect either one share of the merged entity or a cash amount equal to the volume weighted average price of Rock-Tenn shares during a five-day period ending three trading days prior to closing for each share of Rock-Tenn held.  

The elections are to be prorated in such a way that MeadWestvaco holders will own about 50.1% of the new company and 49.9% will be owned by Rock-Tenn. About 7% of Rock-Tenn holders are to receive cash.

The combined company will have combined net sales of $15.7 billion and adjusted EBITDA of $2.9 billion, including the impact of $300 million in estimated annual synergies, to be achieved over three years.

Voorhees, the current chief executive officer (CEO) of Rock-Tenn will serve as CEO and president of the combined company and Luke, the junior chairman and CEO of MeadWestvaco will become non-executive chairman of the board. The board will comprise eight directors from Rock-Tenn and six directors from MeadWestvaco.

The deal is the latest in a string for Rock-Tenn, which has completed $7 billion worth of acquisitions in the past decade, including its $3.5 billion purchase of Smurfit-Stone Container in 2011 that helped catapult its market share of corrugated packaging to about 20%. But the rapid consolidation of the corrugated containerboard market has left Rock-Tenn with few options for further acquisitions, forcing the Georgia-based company to look elsewhere for significant deals.

Our Take

Rock-Tenn will benefit from the Tacoma acquisition, investments and momentum in the Merchandising Displays segment. 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 #3 (Hold). A better-ranked stock in the paper and packaging industry is Mercer International Inc. (MERC) carrying a Zacks Rank #2 (Buy).

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