Shares of Rock-Tenn Company (RKT) gained around 4% since the company reported upbeat first-quarter fiscal 2014 (ended Dec 31, 2013) earnings on Jan 28. Adjusted earnings per share (EPS) jumped 23% year over year to $1.66 from $1.35 in the year-earlier quarter. However, the bottom line fell short of the Zacks Consensus Estimate of $1.73.
Restructuring and other costs and operating losses and transition costs due to plant closures were 16 cents in the reported quarter and 17 cents in the year-ago quarter. Including this, EPS grew 27% year over year to $1.50 from $1.18 in the prior-year quarter.
Total revenue increased 3.3% year over year to $2,362.6 million, but missed the Zacks Consensus Estimate of $2,386 million. The year-over-year sales growth was driven by higher pricing, partly offset by reduced volume.
Operating Performance
On a year-over-year basis, cost of goods sold went up 1.9% to $1,914.8 million. Gross profit rose 9.3% year over year to $447.8 million. Gross margin expanded 100 basis points (bps) to 18.9%.
Selling, general and administrative expenses increased 5.2% year over year to $234.8 million. Adjusted operating income surged 14.2% to $213 million. Consequently, operating margin expanded 100 bps to 9%.
Segmental Performance
Corrugated Packaging: Net sales in the segment rose 3.9% year over year to $1.6 billion in the quarter. Operating income increased 14.6% year over year to $157.7 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 4.2% year over year to $472.1 million. Operating income grew 4.9% year over year to $57.6 million as a result of higher selling prices, partially offset by higher commodity and other costs.
Merchandising Displays Segment: The segment reported sales of $185 million, up 11.7% from the year-ago quarter. Operating income improved 63% year over year to $19.3 million driven by higher volumes.
Recycling: Net sales in the segment declined 21% year over year to $99.6 million, hurt by lower volumes from soft export markets for recovered fiber. The segment reported an operating income of $0.1 million compared with $4.3 million in the year-ago quarter attributable to lower volumes.
Financial Position
As of Dec 31, 2013, cash and cash equivalents amounted to $24.6 million versus $36.4 million as of Sep 30, 2013. Rock-Tenn used cash flow in the quarter to buy back $53 million worth of RockTenn shares, to acquire MPG for $60 million, pay dividends of $26 million. The company has also reduced its leverage ratio from 1.95x to 1.84x.
Long-term debt was $2,750.3 million as of Dec 31, 2013, compared with $2,481.9 million as of Sep 30, 2013. The debt-to-capitalization ratio contracted 100 bps to 38.7% as of Dec 31, 2013, from 39.7% as of Sep 30, 2013.
Cash from operations was $304.5 million in the first quarter of fiscal 2014 ended Dec 31, 2013, up 9.7% from $277.5 million in the prior-year comparable period. The revised dividend will be paid on Feb 24, 2014.
Shipment
Shipments at the Corrugated Packaging segment of 1,814,000 tons declined around 3.6% or 67,000 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 2.6% or 10,000 tons year over year.
Our Take
RockTenn's strong earnings growth reflects continued improvement in its operating performance. 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, RockTenn expects recovered fiber markets to enjoy moderately higher pricing. Rock-Tenn’s investment in box plants, installation of new standard corrugated box operating system and increase in domestic and export pricing will help to boost profitability.
Norcross, Ga.-based RockTenn is one of the leading integrated manufacturers of corrugated and consumer packaging and recycling solutions in North America. It operates in the U.S., Canada, Mexico, Chile, Argentina and China.
Rock-Tenn currently holds a short-term Zacks Rank #3 (Hold).
Stocks with a favorable Zacks Rank in the paper and packaging industry include Resolute Forest Products Inc. (RFP) and UPM-Kymmene Oyj (UPMKY), both carrying a Zacks Rank #1 (Strong Buy), and PH Glatfelter Co. (GLT) holding a Zacks Rank #2 (Buy).
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