Mixed Results for Sonoco - Analyst Blog

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Sonoco Products Co. ( SON ) reported fourth-quarter results delivering an adjusted EPS of 46 cents compared with 59 cents in the year-earlier quarter, which came in the mid way of its guidance range of 45 cents to 47 cents. The reported EPS was in line with the Zacks Consensus Estimate.

Unexpected deterioration in demand in the global Paper and Industrial Converted Products segment late in the quarter, a higher than expected effective tax rate and the impact of 6% fewer days affected the quarter's earnings. The negative factors were partially offset by positive price/cost relationship, which was primarily the result of an approximate 20% decline in the cost of recovered paper, and lower pension and management incentive costs.

The quarter excluded a tax charge of 17 cents per share stemming from restructuring activities, acquisition expenses and acquisition inventory step-up costs. The year-ago quarter excluded the after tax charge of 31 cents per share, 5 cents per share pertaining to restructuring charges and acquisition related costs and a one time benefit of 10 cents per share. Including these one-time items, EPS amounted to 29 cents versus 33 cents in the year-ago quarter.

Net sales was behind the Zacks Consensus Estimate of $1.14 billion. Benefits from increased selling price in the Paper and Industrial Converted Products as well as Consumer Packaging were offset by volume and business mix in both the segments and unfavorable currency translation.

Fiscal 2011 Performance

In 2011, adjusted EPS was reported at $2.29 versus $1.96 in 2010. Adjusted EPS was in line with the Zacks Consensus Estimate. The adjusted EPS also came in the mid way of the guidance $2.28 to $2.30.

The year excluded 16 cents per share in after-tax restructuring charges, acquisition expenses and acquisition inventory step-up costs, partially offset by adjustments to valuation allowances on deferred tax assets. In 2010, EPS excluded after-tax impairment and restructuring charges, debt tender and acquisition expenses along with certain tax adjustments totaling 38 cents per share. Including these items, EPS was $2.13 in 2011 compared with $1.96 in 2011.

Net sales increased 9% to a record $4.49 billion in 2011 from $4.12 billion in 2010. Net sales in fiscal 2011, however, fell short of the Zacks Consensus Estimate of $4.84 billion.

Costs and Margins

Sonoco reported cost of sales of $944.8 million in the reported quarter compared with $927.5 million in the year-ago quarter. Gross profit at Sonoco declined 8.1% to $184.7 million compared with the year-earlier quarter, thereby contracting gross margin by 130 basis points year over year to 16.4%.

Selling, general and administrative expenses decreased marginally to $105.9 million from $107.0 in the year-ago quarter. Sonoco reported adjusted operating income of $65.8 million decreasing from $87.2 in the year-ago-quarter. Operating margins contracted 190 basis points year over year to 5.8% in the quarter.

Segment Performance

Net sales at the Consumer Packaging segment declined 2% year over year to $485.0 million. The decline was attributable to six lesser days offsetting the positive price effect.Operating profit of the segment dropped 6% to $47.8 million. The decline was driven by less number of days in addition to increase in labor cost. The segment's operating margin increased by 530 basis points to 9.8% in the quarter.

Revenues at the Paper and Industrial Converted Products segment decreased to $451.8 million from $474.3 million in the prior-year quarter. The decrease was negatively influenced by low volume, business mix. Less number of days as well as currency translation also impacted negatively. Operating profit at the segment also decreased 17% to $29.4 million. Operating margins, however, increased 330 basis points year over year to 6.5%.

Packaging Services reported revenues of $109.1 million, down from $133.2 million in the year-ago quarter. Operating profit declined to $1.7 million from $2.3 million in the prior-year quarter, driven by lower volumes, negative business mix, negative productivity and fewer days. Accordingly, operating margins decreased 6 basis points year over year to 0.15% in the quarter.

Protective Packaging segment of Sonoco reported net sales of $84 million, up from $26 million in the year-earlier quarter. The improvement was driven entirely due to 53 days of sales from the recently completed Tegrant acquisition. This offset the impact of fewer days and volume reduction from the company's legacy protective packaging business.

Operating profit at the segment rose 22% to $5.2 million from $4.3 million in the year-earlier quarter as a result of the Tegrant acquisition, which more than offset lower volume, fewer days and a negative price/cost relationship experienced by the company's legacy protective packaging business. Consequently, operating margins expanded 580 basis points year over year to 6.2% in the quarter.

Financial Position            

As of December 31, 2011, cash and cash equivalents were $175.5 million, up from $158 million as of December 31, 2011. Cash from operating activities decreased to $113.4 million during the quarter from $114.6 million a year ago.

The company's debt-to-total-capital ratio increased to 46% on December 31, 2011, from 32% as of October 2, 2011 and 30.9% as of July 3, 2011.  Sonoco closed the acquisition of Tegrant Corporation on November 8, 2011. The deal was closed at $550 million.

Outlook

Sonoco guides its first quarter EPS in the range of 45 cents to 50 cents while full year EPS is guided in the range of $2.32 to $2.42 based on the assumption that sales demand will remain near current levels, adjusted for seasonality. It also expects effective tax rate of 33.5%

Our Take

Sonoco continues with its strategy of growing through acquisitions. In November 2011, it completed the acquisition of American Recycling apart from Tegrant. The company was greatly benefited by these acquisitions.The acquisition of Tegrant is not only the largest in the company's history but will position it as the leader in multimaterial protective packaging in North America.

However, raw material inflation, high customer concentration and a still fragile construction industry remain a concern for the company. We currently have a Zacks #4 Rank (short-term "Sell" recommendation) on the stock.

Hartsville, South Carolina-based Sonoco is a global manufacturer of consumer and industrial packaging products. The company has more than 300 operations in 35 countries throughout North and South America, Europe, Australia and Asia.

The company operates through four reportable segments: Tubes and Cores/Paper, Consumer Packaging, Packaging Services and All Other Sonoco segment. Sonoco competes with Bemis Company Inc. ( BMS ) and Rock-Tenn Co. ( RKT ).


 
BEMIS ( BMS ): Free Stock Analysis Report
 
ROCK-TENN CO ( RKT ): Free Stock Analysis Report
 

SONOCO PRODUCTS ( SON ): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: BMS , RKT , SON

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