Rock-Tenn Company’s RKT second-quarter fiscal 2015 (ended Mar 31, 2015) adjusted earnings per share of 85 cents improved 35% from 63 cents in the year-ago quarter driven by strong revenue and operating performance across all its businesses. Earnings came above the company’s guidance range of 70 cents to 75 cents per share and also surpassed the Zacks Consensus Estimate of 73 cents.
Including restructuring and other costs, earnings per share in second-quarter fiscal 2015 went up 35% to 77 cents from 57 cents in the prior-year quarter.
Total revenue increased 2.6% year over year to $2.46 billion. The year-over-year improvement came on the back of the Tacoma Mill acquisition completed in fiscal 2014 and higher corrugated volumes. However, shares of Rock-Tenn fell around 0.4% as revenues lagged the Zacks Consensus Estimate of $2.47 billion.
Operating Performance
On a year-over-year basis, cost of goods sold went up 1.6% to $1.99 billion. Gross profit increased 7% year over year to $457 million. Gross margin increased 80 basis points (bps) to 18.6%.
Selling, general and administrative expenses increased to $252.6 million from $245.5 million in the prior-year quarter. Segment income increased to $222 million from $202 million in the year-ago quarter. The increase in segment income was primarily due to productivity improvements, lower fiber and energy prices, less weather related disruption and higher corrugated volumes, partially offset by decreased corrugated selling prices, lower merchandising displays income and other costs across the business. Operating margin expanded 100 basis points to 9%.
Segmental Performance
Corrugated Packaging: Net sales in the segment rose 4.6% year over year to $1.72 billion in the quarter primarily driven by the Tacoma Mill acquisition and increased corrugated segment shipments. Operating income also went up 27.6% year over year to $170 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 reported net sales of $485.6 million, down from $489.3 million in the year-ago quarter due to the impact of the planned major maintenance outage at Demopolis, AL bleached paperboard mill. Operating income also declined 3% to $47.7 million from $49.3 million in the year-ago quarter, reflecting the impact of higher manufacturing costs.
Merchandising Displays Segment: The segment’s net sales remained flat year over year at $213 million. Higher volumes from the two display acquisitions, completed in fiscal 2014, were offset by lower promotional activity. Operating income dipped nearly four-fold year over year to $4.7 million due to increased costs and a more competitive commercial environment.
Recycling: Net sales in the segment declined 15.9% year over year to $75.8 million due to lower recovered fiber prices as a result of weak global markets as well as the impact of the west coast port slowdown and collection facility closures. The segment reported an operating loss of $0.4 million as against a profit of $2.8 million in the year-ago quarter.
Financial Position
Rock-Tenn reported cash and cash equivalents of $39.7 million at the end of second-quarter fiscal 2015 versus $32.2 million in the previous quarter. The company generated $218.4 million in cash from operating activities during the quarter compared with $226.6 million in the prior-year quarter. Long-term debt was $2.62 billion as of Mar 31, 2015, compared with $2.63 billion as of Mar 31, 2014.
Shipment
During the second quarter, shipments of 1,937,000 tons at the Corrugated Packaging segment increased around 7% from the year-ago quarter, mainly driven by acquisitions. However, the Consumer Packaging segment’s shipments decreased about 1.9% year over year to 379,000 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 Corporation MWV 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 merger is expected to be completed in Jun 2015.
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 #4 (Sell).
Another stock in the paper and packaging industry, Veritiv Corporation VRTV will report its first-quarter 2015 results on May 13, 2015.
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