Sonoco Products Co. (SON) delivered adjusted earnings per share (EPS) of 59 cents in its fourth quarter, beating the Zacks Consensus Estimate and the year-earlier EPS by a penny each. The quarter’s EPS was at the mid-point of the guidance range of 57 cents to 61 cents, outperforming the company’s expectation of earnings coming in at the lower end of the range.
The year-over-year increase was driven by improved volume and lower pension costs, which were partially offset by a negative price/cost relationship and a higher base effective tax rate.
Fourth quarter adjusted EPS excluded after-tax charges of 31 cents per share related to a debt tender completed during the quarter, restructuring charges and acquisition costs of 5 cents per share and one-time tax benefits of 10 cents per share.
The prior-year figure excluded after-tax restructuring charges of 7 cents and a tax adjustment of 5 cents. Taking these items into effect, EPS in the quarter was 33 cents compared with 46 cents in the year-ago quarter.
Revenues for the quarter increased 12% year over year to $1.1 billion, outpacing the Zacks Consensus Estimate of $1.08 billion driven by improved volumes, higher selling prices, accretive acquisitions and open-market sales of corrugating medium, which were previously produced under a cost-plus-fixed-management-fee arrangement.
Costs & Margin Performance
On dollar terms, cost of sales increased 15% year over year to $927.5 million in the quarter and, as a percentage of revenues, increased 160 basis points to 82.3%. Gross profit upped 3% to $199.7 million on an annualized basis whereas, gross margin contracted 160 basis points to 17.7% due to higher raw material, energy, freight and other costs.
Selling, general, administrative and engineering expenses improved 2% year over year to $107 million and, as a percentage of sales, dipped 140 basis points to 9.5%. Sonoco’s adjusted operating income grew 9% year over year to $92.6 million while operating margin contracted 30 basis points to 8.2%.
Segment Performance
Tubes and Cores/Paper segment posted a year-over-year growth of 17% to reach revenues of $447.2 million in the reported quarter driven by increased selling prices, expanding volumes of industrial converted products, paperboard, and recycled materials along with the addition of sales of corrugating medium.
Segment operating income improved 42% to $33.9 million and segment margin went up 140 basis points to 7.6%. The increase was attributed to volume growth, lower pension costs and productivity improvements, which were somewhat offset by a negative price/cost relationship, increased operating costs and the impact of a November fire that destroyed Sonoco’s molded plug manufacturing facility.
Revenues at the Consumer Packaging segment climbed 9% to $457.8 million due to the acquisition of Associated Packaging Technologies partially offset by a slight decline in volume.
Segment income however dropped 6% to $45.7 million and segment operating margin contracted 160 basis points to 10% hurt by lower volumes and higher operating costs, which were instrumental in offsetting the positive impact of the acquisition, lower pension costs and productivity improvements during the fourth quarter.
The Packaging Services segment delivered revenues of $131.1 million, a growth of 5%, driven by improved volumes and mix. Segment income plunged 52% to $1.9 million and segment margin contracted 170 basis points to 1.5% due to a negative change in the mix of business completely overshadowing volume improvement.
The All Other Sonoco segment’s revenues increased 22% to $91 million attributable to volume gains in molded plastics, reels and spoons, along with acquisition sales and higher selling prices.
The segment’s operating income was up 36% to $11.4 million and segment operating margin expanded 140 basis points as a result of volume and productivity gains, lower pension costs partially affected by rising material costs, which were not covered by higher selling prices.
Fiscal 2010 Performance
Sonoco’s fiscal 2010 adjusted EPS was $2.34, up 31% from $1.78 in the prior year. The EPS was ahead of the Zacks Consensus Estimate by a penny. The adjusted EPS was at the mid-point of the company’s guidance range of $2.32 to $2.36 per share.
The fiscal 2010 EPS excluded an after-tax debt tender charge of 31 cents per share and after-tax asset impairment and restructuring charges of 15 cents and a tax benefit of 8 cents per share related to the tax law change in Mexico.
The prior year’s EPS excluded the after-tax effect of restructuring and asset impairment charges of 23 cents and a charge of 5 cents related to the tax law change in Mexico. Netting these items, Sonoco reported an EPS of $1.96 in 2010 compared with $1.50 in 2009.
Revenues went up 15% to a record of $4.12 billion, but still falling short of the Zacks Consensus Estimate of $4.40 billion.
Financial Position
Sonoco ended fiscal 2010 with cash and cash equivalents of $158.2 million, down from $185.2 million as of fiscal 2009 end. The company generated cash flows of $375 million from operating activities in the year, down from $391 million in the prior year.
Higher earnings in 2010 were offset by an increased use of cash flow to fund working capital resulting from significantly higher levels of business activity, compared to the prior year.
Dividends paid were $111.8 million during the year compared with $107.9 million in 2009. Sonoco used $138 million of cash for acquisitions and repurchased 695,000 shares of common stock for approximately $23 million. The share buyback was a part of the company’s plans to repurchase 2 million shares of its common stock by the end of the first quarter of 2011.
During the quarter, Sonoco entered into a new five-year syndicated bank facility to replace an existing facility that was scheduled to expire in May 2011. The bank facility supports the company’s $350 million commercial paper program, of which $30 million was outstanding at year end.
Sonoco issued $350 million of new 5.75% thirty-year bonds, the proceeds of which were utilized for early redemption of 55% of its other outstanding bonds. Sonoco also redeemed $100 million of 6.75% bonds that matured in November. As of December 31, 2010, the debt-to-capitalization ratio improved marginally to 29.2% from 29.6% as of December 31, 2009.
Outlook
Sonoco expects earnings per share to be within a band of 55 cents and 60 cents for the first quarter of fiscal 2011. Even though Sonoco’s first quarter results have been weak historically, the company expects a modest volume improvement in the quarter. Sonoco maintained its fiscal 2011 guidance range of $2.52–$2.62 per share.
Our Take
We believe Sonoco’s strategy to grow through acquisitions, potential restructurings and an increased focus on the emerging markets will certainly bring long-term benefits to the company. 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.
It 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 Smurfit-Stone Container Corp. (SSCC).
BEMIS (BMS): Free Stock Analysis Report
SONOCO PRODUCTS (SON): Free Stock Analysis Report
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