Shares of Sonoco Products Co. (SON) gained 0.5% and closed at $42.05, a day after the company reported fourth-quarter 2013 adjusted earnings of 58 cents per share, which rose 3.5% from 56 cents earned in the year-ago quarter. Earnings were in line with the Zacks Consensus Estimate and company’s guidance range of 55–59 cents.
The quarterly results excluded 5 cents per share of an after-tax charge related to restructuring activities associated with the expected plant closure in Ireland and Canada. Including this, fourth-quarter 2013 earnings were 53 cents per share as against 42 cents in the year-ago quarter, which excluded an after-tax charge of 14 cents per share related to restructuring activities and taxes on the repatriation of offshore cash.
Operational Update
Net sales increased 3% year over year to $1.21 billion in the quarter, in line with the Zacks Consensus Estimate. The year-over-year sales improvement was driven by higher volume and selling prices.
Cost of sales increased 2.2% year over year to $993.7 million. Gross profit went up 8% year over year to $221 million. Gross margin grew 90 basis points (bps) to 18.2%, driven by strong productivity gains, volume growth and a positive price-cost relationship. These were partially offset by a rise in maintenance, labor and other costs.
Selling, general and administrative expenses increased 13.7% year over year to $127 million due to wage inflation and higher management incentives. Sonoco’s adjusted operating income rose 2% year over year to $93.8 million from $91.9 million in the year-ago quarter. However, operating margin contracted 10 bps year over year to 7.7%.
Segment Performance
The Consumer Packaging segment reported net sales of $482 million, up 4% from $463.8 million in the prior-year quarter. The rise was attributable to volume improvement and a positive mix of business in packaging, composite cans and rigid plastic containers, along with higher sales prices and acquisition of a small graphics management business in the U.K. These factors were partially offset by the negative impact of foreign exchange.
Operating profit grew 20.6% year over year to $48.4 million. The improvement came on the back of volume/mix gains, positive price-cost relationship and productivity improvements, partially offset by higher labor and operating costs.
Net sales at the Paper and Industrial Converted Products segment went up 3% year over year to $463.6 million, driven by higher selling prices primarily associated with recovery in paper costs and volume and mix gains in North America and Europe. These were somewhat offset by the closure of European recycling operations and the negative impact of foreign exchange.
Operating profit however, decreased 8% year over year to $33.3 million due to higher maintenance and labor costs and increase in the profit deferred on intercompany paper sales.
Display and Packaging segment’s net sales increased 1% year over year to $131.6 million from $130 million in the year-earlier quarter. Volume growth in the U.S. display and packaging business was offset by lower contract packaging volume.
Operating profit rose 2.8% year over year to $4.6 million on an improved mix of business in U.S. display and packaging activities, partially offset by higher labor and other operating costs.
Protective Solution segment’s net sales went up 3% year over year to $137.6 million. The increase was mainly driven by volume expansion in the industrial and consumer protective businesses, offset by the divestiture of a small box plant.
Operating profit at the segment declined to $6.7 million from $9.5 million in the year-ago quarter, primarily due to a negative price/cost relationship, along with rise in labor and other operating costs such as the institution of a plant in Mexico and an unfavorable mix of business in retail packaging.
Financial Performance
Sonoco ended 2013 with cash and cash equivalents of $217.6 million, down from $373 million as of 2012-end. Cash flow from operations was $538 million infiscal 2013, compared with $404 million in the prior year.
The long-term debt of the company decreased to $946 million as of Dec 31, 2013 from $1,099 million as of Dec 31, 2012. Consequently, debt-to-capitalization ratio contracted to 36% as of Dec 31, 2013 from 47.7% as of Dec 31, 2012.
The Board of Sonoco declared a quarterly dividend of 31 cents per share, to be paid on Mar 10, 2014 to shareholders of record on Feb 26, 2014.
Fiscal 2013 Performance
For full-year 2013, Sonoco reported earnings per share of $2.30, up 4% from $2.21 in 2012. The results were in line with the Zacks Consensus Estimate of $2.30. The year-over-year growth was driven by productivity improvements, modest volume growth and a positive price/cost relationship, partially offset by higher labor, maintenance, pension and other expenses.
Revenues for the year 2013 rose 1% year over year to $4.85 billion. Revenues marginally beat the Zacks Consensus Estimate of $4.84 billion.
Outlook
For the full year 2014, Sonoco expects earnings per share to range from $2.43 to $2.53. The company also remains committed to earnings per share target of $2.51, reflecting 9.1% improvement over 2013 base earnings driven by expected growth in volume/mix, lower pension expense, productivity improvements and a positive price/cost relationship. Free cash flow is anticipated to be around $130 million for 2014.
Sonoco expects first-quarter 2014 earnings per share in the range of 50–54 cents. The company also announced to repurchase about 2 million shares in 2014, which would add approximately 2 cents to earnings per diluted share for the year.
Our View
Organic sales growth, geographic expansion and strategic acquisitions remain growth drivers for Sonoco. However, global economic factors and possible changes in raw material prices remain headwinds for the company.
South Carolina-based Sonoco is a global provider of a variety of consumer packaging, industrial products, protective packaging and packaging supply chain services. The company is also the largest producer of paper-based tubes and cores in North America.
At present, Sonoco carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Ball Corporation (BLL), Resolute Forest Products Inc. (RFP) and Packaging Corporation of America (PKG). While Ball Corporation and Resolute Forest Products sport a Zacks Rank #1 (Strong Buy). Packaging Corporation has a Zacks Rank #2 (Buy).
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