10-K Tuesdays: Rock-Tenn

posted in: Notes | 0

We are taking a look at Rock-Tenn ($RKT) this week, a name that popped up in Avondale’s proprietary quantitative value screen. The screen looks at historical financial data to potentially identify high quality companies trading at low valuations. The screen is an important part of Avondale’s investment process, but this post should not be taken as an investment recommendation.

Fundamental Data

Price: $101.70
Market Cap: $7.3 B

Income Statement:

Revenue: $9.5 B
Gross Profit: $1.8 B
Operating Profit: $814 m
Gross Margin: 19%
Operating Margin: 8.5%

Balance Sheet:

Cash: $46 m
PP&E net of depreciation: $5.6 B
Tangible Assets: $8.2 B
Debt: $2.2 B
Pension Liability: $1 B

Statement of Cash Flow:

OCF: $1.03 B
D&A: $552 m
Capex: $440 m

Notes From 10-K Filed (11-18-2013)

We are one of North America’s leading integrated manufacturers of corrugated and consumer packaging.

Three Segments:

Sales and Income by Segment

Facilities and Capacity (thousands of tons)

Location of Facilities and Capacity

Corrugated Packaging (68% of sales)

Shipments of Corrugated Packaging (Thousands of Tons, SF=Square feet):

Corrugated Packaging Shipments

containerboard mills and corrugated converting operations

high-quality corrugated containers designed to protect, ship, store and display products

packaging for shipment and distribution of food, paper, health and beauty and other household, consumer, commercial and industrial products

serve local customers and large national accounts.

We provide customers with innovative packaging solutions to advertise and sell their products. We also provide structural and graphic design, engineering services and custom, proprietary and standard automated packaging machines, offering customers turn-key installation, automation, line integration and packaging solutions.

To make corrugated sheet stock, we feed linerboard and corrugated medium into a corrugator that flutes the medium to specified sizes, glues the linerboard and fluted medium together and slits and cuts the resulting corrugated paperboard into sheets to customer specifications.

Consumer Packaging (27% of sales)

Shipments of Consumer Packaging

Consumer Packaging Shipments

coated and uncoated paperboard mills

Our consumer packaging converting operations include folding carton converting operations as well as our 65% owned solid fiber interior packaging converting operations.

We internally consume or sell our coated recycled and bleached paperboard to manufacturers of folding cartons, and other paperboard products.

We are one of the largest manufacturers of folding cartons in North America and believe we are the largest manufacturer of solid fiber partitions in North America measured by net sales.

cartons are used to package food, paper, health and beauty and other household consumer, commercial and industrial products primarily for retail sale.

We print, coat, die-cut and glue the cartons to customer specifications and ship finished cartons to customers for assembling, filling and sealing.

We also manufacture and assemble (pack out) temporary and permanent point-of-purchase displays.

Recycling (5% of sales)

Recycling Volumes:

Recycling Segment Fiber Brokered

recycled fiber brokerage and collection operations


Raw Materials:

Recycled Mills: recycled fiber at our recycled paperboard and recycled containerboard mills and

Containerboard and Bleached Paperboard Mills: virgin fibers from hardwoods and softwoods

Converting operations: We supply substantially all of our converting operations’ needs for recycled paperboard and containerboard from our own mills

Energy is one of the most significant costs of our mill operations…In our virgin fiber mills, we use wood by-products (biomass), coal, fuel oil and natural gas to generate steam used in the paper making process to generate some or all of the electricity used on site and to operate our paperboard machines. We use primarily electricity and natural gas to operate our converting facilities. We generally purchase these products from suppliers at market or tariff rates.

Inbound and outbound freight is a significant expenditure for us.

We spent approximately $623 million on all energy sources in fiscal 2013. Natural gas and fuel oil accounted for a little less than two-fifths (approximately 39 million MMBtu) of our total energy purchases in fiscal 2013.

A hypothetical 10% increase in recycled fiber prices in our mills for a fiscal year would increase our costs by approximately $64 million

A hypothetical 10% increase in virgin fiber prices in our mills for a fiscal year would increase our costs by approximately $70 million.

Although the majority of the containerboard consumed is produced at our mill locations, we do purchase containerboard externally. A hypothetical 10% increase in containerboard costs for containerboard purchased externally, net of trade swaps, would result in increased costs of approximately $21 million in a fiscal year.

A hypothetical 10% increase [in freight costs] for a fiscal year would increase our costs by approximately $89 million in a fiscal year.

25,800 employees…11,900 of our hourly employees are covered by collective bargaining agreement


Our top 10 external customers represented approximately 15% of consolidated net sales in fiscal 2013

we sold approximately half of our coated recycled paperboard mills’ production and bleached paperboard production to internal customers…two-thirds of our containerboard production…approximately one-third of our specialty mills’ production to internal customers

paperboard and containerboard industries are highly competitive, and no single company dominates any of those industries…Our competitors include large and small

Notable Risks

the costs of recovered paper and virgin fiber, our principal externally sourced raw materials, have fluctuated significantly due to market and industry conditions…The paperboard, containerboard and converted products industries historically have experienced significant fluctuations in selling prices…Our operations generally have high fixed operating cost components and therefore our earnings are highly dependent on volumes, which tend to fluctuate.

Back of the Envelope Math

Corrugated Segment:

Revenue: $6,550 m; Segment Profit: $680 m

77.1 billion square feet produced per year; 7.5 million tons of material

implies ~8.5 cents in revenue per square foot; $873 per ton of material

implies 0.88 cents in profit per sqft; $90 per ton

If one cubic foot box uses 6 square feet of material then produce about 12.85 billion boxes (assume 1 cubic foot) per year.  Produce 51 million boxes per day.  Revenue of ~50c per box.

42 cubic foot boxes per US capita per year. (Divide by lateral length-squared for each incremental cubic foot of average box size).

One ton of material makes about 1750 boxes of 1 cubic foot.

Consumer Segment:

Revenue: $2,528 m Segment Income: $295

20.7 BSF per year; 1.4 million tons of material

implies ~12 cents revenue per square foot; $1,805 per ton of material

inmplies 1.4 cents in profit per sqft; $210 per ton of material

If a milk carton uses about 1 sq foot of material, the paper content of the gallon of milk would be 12c or about 3.5% of the cost of a gallon of milk.

that means Rock Tenn produces enough consumer paper to make 20 billion milk cartons, 66 gallons per capita per year.  The average american drinks 22 gallons of milk per year.

Average operating Metrics

Total tons of Capacity: 9.3 million

Sqft of Material produced per ton of capacity: ~10,000

operating profit per square foot: 1 cent

Revenue per ton: ~$1,000

Gross profit per ton: ~$200

Operating profit per ton: ~$100

Cost analysis:

COGS: 7,698

Cost components (imputed from 10% sensitivity analysis in 10-K):

Energy: $623 m (8%) Energy cost per ton: $67

Freight: $890 m (12%) Freight cost per ton: $96

Market pulp costs $700-$900 per ton

Depreciation Analysis

$552 m per year depreciation

$5,554 m in net PP&E

Implies 10 years worth of life left in equipment

9.3 m tons of capacity can produce 93 m tons of material in remaining useful life

Enterprise Value Analysis

Enterprise Value: $9.4 B

EV/ton of Capacity = $1010

EV/ton of “remaining useful life” capacity = $101

Enterprise value worth ~94 million tons of operating profit, roughly equal to remaining useful life of equipment.