Sonoco Products Co. (SON) recently reported third-quarter results delivering an EPS of 66 cents, a penny more than the year-earlier quarter. The reported EPS beat the Zacks Consensus Estimate of 64 cents and came in at the mid point of the company’s guidance range of 64 cents to 68 cents.
Volume contraction, higher raw material prices and energy and freight costs were offset by productivity improvements and lower selling and administrative costs.
The quarter excluded a net gain of 10 cents stemming from a net release of valuation allowances on deferred tax assets, partially offset by restructuring charges and acquisition expenses. The year-ago quarter excluded the net effect of 8 cents pertaining to restructuring charges and acquisition related costs. Including these one-time items, adjusted EPS amounted to 76 cents versus 65 cents in the year-ago quarter.
Net sales increased 7% to $1.124 billion in the reported quarter from $1.051 billion in the prior-year quarter. Sales, however, missed the Zacks Consensus Estimate of $1.127 billion. Though the company witnessed a slight decline in volumes, productivity improved marginally.
Costs and Margins
Sonoco reported cost of sales of $937.4 million in the reported quarter compared with $852.1 million in the year-ago quarter. Gross profit at Sonoco declined 6% to $186.7 million compared with the year-earlier quarter, thereby contracting gross margin by 240 basis points year over year to 16.6%.
Selling, general and administrative expenses dropped 12% to $89.9 million from the year-ago quarter. Sonoco reported adjusted operating income of $98.5 million, flat year over year. Operating margins contracted 60 basis points year over year to 8.8% in the quarter.
Segment Performance
Net sales at the Consumer Packaging segment increased 7% year over year to $465.7 million driven by higher selling prices, volume growth in flexible packaging and rigid plastic containers, and favorable currency translation. Operating profit at the segment upped 2% to $47.2 million.
The improvement was driven by volume growth, productivity improvements and lower pension, and selling and administrative expenses slightly offset by a negative price/cost relationship and a change in the mix of business. The segment’s operating margin dipped marginally by 50 basis points to 10.1% in the quarter.
Revenues at the Tubes and Cores/Paper segment soared to $453.4 million from $412.3 million in the prior-year quarter due to higher selling prices and favorable currency translation. Operating profit at the segment however decreased 10% to $33.9 million.
A decline in volume, negative business mix, wage inflation and a slightly negative price/cost relationship more than offset productivity improvements and lower pension, and selling and administrative expenses. Operating margins also dropped 170 basis points year over year to 7.5%.
Packaging Services reported revenues of $110.5 million, down from $112.4 million in the year-ago quarter. Operating profit more than doubled to $4.1 million from $1.9 million in the prior-year quarter driven by operating cost improvements and lower selling and administrative expenses. Accordingly, operating margins increased 200 basis points year over year to 4% in the quarter.
All Other Sonoco segments reported net sales of $94.5 million, up from $90.5 million in the year-earlier quarter. The improvement was driven by higher selling prices, volume gains in molded plastics and reels and spools, and favorable currency translation, partially offset by lower volume in protective packaging.
Operating profit at the segment rose to $13.2 million from $12.5 million in the year-earlier quarter as a result of productivity gains, positive price/cost, and lower selling and administrative costs, which more than countered a negative impact from volume and mix. Consequently, operating margins expanded 20 basis points year over year to 14% in the quarter.
Financial Position
As of October 2, 2011, cash and cash equivalents were $146.3 million, up from $134 million as of July 3, 2011. Cash from operating activities decreased to $99.8 million during the quarter from $145.2 million a year ago.
The company’s debt-to-total-capital ratio increased to 32% as of October 2, 2011 from 30.9% as of July 3, 2011.
Sonoco expects to close the recently announced $550 million acquisition of Tegrant Corporation in mid November. The impact on 2011 base earnings is not expected to be significant.
Outlook
Sonoco guides fourth quarter EPS in the range of 59 cents to 63 cents while full year EPS is guided in the range of $2.41 to $2.45 based on the assumption that sales demand will remain near current levels, adjusted for seasonality. The company has lowered its guidance from the earlier range of $2.46 to $2.54 given a more cautious outlook on global economic conditions and the direction of consumer spending.
Our Take
The Tegrant acquisition not only marks the largest in the company’s history but also will position it as the leader in multimaterial protective packaging in North America. We believe Sonoco’s strategy to grow through acquisitions, potential restructurings and increased focus on emerging markets will certainly bring long-term benefits.
However, raw material inflation, high customer concentration and a still fragile construction industry will affect its financial results in the near term. We currently have a Zacks #3 Rank (short-term Hold 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).
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SONOCO PRODUCTS (SON): Free Stock Analysis Report
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