Sonoco Products Co.
's (
SON
) third-quarter 2012 adjusted earnings were 55 cents per share
compared with 66 cents in the year-ago quarter. Earnings exceeded
the previous guidance range of 51 cents to 53 cents provided by
the company. Earnings were ahead of the Zacks Consensus Estimate
of 52 cents per share.
The quarter excluded benefits of 2 cents per share on the sale of
closed facilities and insurance recoveries, partially offset by
charges stemming from restructuring activities. The year-ago
quarter excluded benefits of 17 cents per share pertaining to net
release of valuation allowances on deferred tax assets and 7
cents of expenses related to restructuring and acquisition.
Including these items, third-quarter 2012 earnings were 57 cents
per share compared to 76 cents in the year-ago quarter.
Net sales increased 6.3% to $1.196 billion, beating the Zacks
Consensus Estimate of $1.188 billion. The improvement in sales
was attributable to incremental revenues of $121 million from
acquisitions completed last year, mostly related to the Tegrant
acquisition and higher volumes especially from Packaging Services
and Paper and Industrial Converted Products segments. These
benefits were however partially offset by lower selling price and
unfavorable foreign currency translation of $30 million.
Costs and Margins
Cost of sales increased 5.5% to $989.3 million in the reported
quarter. Gross profit at Sonoco went up 10.4% to $206.2 million,
thereby, expanding gross margin by 70 basis points (bps) to
17.3%.
Selling, general and administrative expenses increased 22.7% to
$110.3 million in the quarter. Sonoco's adjusted operating income
dipped 5.9% to $92.7 million in the quarter from $98.6 million in
the year-ago quarter. Operating margin edged down year over year
100 bps to 7.8%.
Segment Performance
Net sales at the
Consumer Packaging
segment dropped 5.4% to $475.9 million. The decline was brought
about by lower volumes in global composite can, flexible
packaging and rigid plastic businesses coupled with lower sales
price and negative impacts of foreign currency translation.
Operating profit of the segment also declined 16% to $43.8
million. The decline was driven by a negative volume and mix
change in addition to higher pension, labor as well as other
expenses, partially offset by improvements in productivity and
positive price/cost mix. Consequently, operating margin
contracted 120 bps to 9.2% in the quarter.
Net Sales at the
Paper and Industrial Converted Products
segment decreased 6.3% to $453.6 million due to lower recovered
paper price and currency translation.
Operating profit at the segment decreased 12.8% to $33.2 million.
Operating profit declined because of higher pension expenses,
labor expenses, freight expenses and other costs in addition to
temporary operating problems in certain North American paperboard
mills, partially offset by productivity gains and positive
price/cost mix. Operating margins fell 60 bps year over year to
7.3%.
Packaging Services
segment's net sales increased 10% to $124.6 million from $112.9
million in the year-earlier quarter. The improvement was
attributable to volume gains mostly in international packaging
fulfillment activities, partially offset by unfavorable foreign
currency translation.
Operating profit rose 6% to $5.1 million in the quarter, driven
by higher volumes related to international packaging fulfillment
activities, partially offset by a negative business mix and
impact of strong dollar. However, operating margin dropped 20 bps
year over year to 4.1%.
Protective Packaging
segment's net sales jumped 494.3% to $141.4 million. The increase
was mainly driven by Tegrant acquisition.
Operating profit at the segment saw a whopping increase of 216.6%
to $10.6 million as a result of the acquisition of Tegrant.
However, operating margins contracted 660 bps year over year to
7.5% in the quarter.
Financial Position
As of September 30, 2012, cash and cash equivalents were $201.1
million, up from $175.5 million as of September 30, 2011. Cash
flow from operating activities was $152.2 million during the
third-quarter 2012 compared with $99.8 million in the prior year
quarter.
The company's debt-to-total-capital ratio improved to 44.6% as of
September 30, 2012, from 47.4% as of July 1, 2012 and 45.8% as of
April 1, 2012.
Outlook
Sonoco guides its full year earnings in the range of $2.17 to
$2.21 per share. It expects free cash flow of $90 million, up
from the previous guidance of $70 million.
Our View
Sonoco is experiencing weak volumes in its Consumer Packaging
segment in North America as well as in Asia. Moreover, lower
recycled paper prices remain a major concern for the company
affecting the Paper and Industrial Converted Products segment.
Sonoco retains a short-term Zacks #5 Rank (Strong Sell). We have
a long-term Underperform recommendation on the stock.
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