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Shares of Rock-Tenn Company (RKT - Analyst Report) declined 12% since it reported fourth-quarter 2013 results on Nov 4. Despite reporting record earnings per share of $2.66 in the fourth quarter, shares dropped due to concerns regarding the negative impact of cost headwinds and anticipated downtime on 2014 results. The 91% year-over-year growth in the quarter was driven by strong operating performance, higher pricing and continued productivity improvements, partially offset by higher commodity costs.

Restructuring and other costs and operating losses and transition costs due to plant closures were 26 cents per share in the reported quarter. Including these items, earnings in the fourth quarter were $2.40 per share versus $1.14 in the year-ago quarter. Prior-year quarter earnings included restructuring and other costs of 19 cents and loss on extinguishment of debt of 6 cents per share.

Total revenue improved 5.3% year over year to $2,485 million, but missed the Zacks Consensus Estimate of $2,557 million.

Operating Performance

On a year-over-year basis, cost of goods sold remained flat at $1,930 million. Gross profit improved 32% year over year to $555 million. Gross margin expanded 450 basis points (bps) to 22.3%.

Selling, general and administrative expenses increased 3% year over year to $250 million. Adjusted operating income surged 72% to $305 million.

Segmental Performance

Corrugated Packaging: Net sales in the segment rose 8% year over year to $1.7 billion in the quarter. Operating income surged 111% year over year to $238 million. Results were aided by higher selling prices and increased synergies, partially offset by higher commodity and other costs.

Consumer Packaging: The segment’s net sales increased 1.6% year over year to $671.5 million. Operating income declined 10% year over year to $89 million as a result of higher commodity and other costs, partly offset by higher selling prices and volumes.

Recycling: Net sales in the segment went up 4.4% year over year to $276 million led by increased selling prices. The segment reported operating income of $4.6 million against a loss of $2.8 million in the year-ago quarter attributable to the impact of improved cost structure.

Fiscal 2013 Performance

Rock-Tenn posted adjusted earnings of $7.30 per share for fiscal 2013, a 63% increase from $4.48 in fiscal 2012. Earnings were ahead of the Zacks Consensus Estimate of $6.44. Including special items, the company posted earnings of $9.95 per share versus $3.45 a year ago.

Revenues for the full-year increased 3.7% year over year to $9.54 billion from $9.20 billion in fiscal 2012. It surpassed the Zacks Consensus Estimate of $9.7 billion.

Financial Position

As of Sep 30, 2013, cash and cash equivalents amounted to $36.4 million versus $37.2 million as of Sep 30, 2012. Long-term debt was $2,842 million as of Sep 30, 2013, compared to $3,151 million in the year ago quarter. The debt-to-capitalization ratio contracted 100 bps to 40% as of Sep 30, 2013, from 50% as of Sep 30, 2012.

Cash from operations for the twelve-month period ended Sep 30, 2013, were $1032.5 million, up 57% from $656.7 million in the year-ago comparable period.

On Oct 25, 2013, Rock-Tenn declared a 17% increase in its annual dividend to $1.40 per share. The new dividend will be paid on Nov 18, 2013.

Shipment

The Corrugated Packaging segment’s shipment decreased by 34,000 tons from the year-ago quarter due to lower domestic sales. However, the Consumer Packaging segment’s paperboard and pulp shipments increased about 16,000 tons compared to the prior-year quarter.

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. Rock-Tenn’s investment in box plants, installation of new standard corrugated box operating system and increase in domestic and export pricing will help will help in improving its 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 #5 (Strong Sell).

Other stocks with favorable Zacks Rank in the paper and packaging industry include KapStone Paper and Packaging Corporation (KS - Snapshot Report) and Svenska Cellulosa Aktiebolaget SCA (publ) (SVCBY) both carrying Zacks Rank #1 (Strong Buy), and  Orchids Paper Products Company (TIS - Snapshot Report) which holds a Zacks Rank #2 (Buy).

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