Sonoco Products Co. (SON) registered its
strongest first quarter results delivering an EPS of 56 cents in
the quarter up 17% from 48 cents in the prior year quarter, but
missing the Zacks Consensus Estimate by a penny.
Included in the results were 2 cents pertaining to restructuring
expenses and a gain of a cent from other adjustments; excluding
these, adjusted EPS amounted to 57 cents versus 50 cents in the
prior-year quarter.
Earnings improved during the quarter, mainly due to volume
growth along with six additional days in the quarter. Besides,
manufacturing productivity improvement, earnings from acquisitions,
lower pension costs and favorable price/cost relationship were
partially offset by higher labor, freight and energy expenses.
Net sales as reported by the company during the quarter amounted
to $1,117.3 million versus $935.1 million in the year-earlier
quarter, striding ahead of the Zacks Consensus Estimate of $1,021
million. Net sales improved due to a longer quarter; higher selling
prices, realized mainly from Tubes and Cores/Paper segment; other
volume gains; acquisitions and the positive impact from foreign
currency translation.
Cost and Margins
Cost of sales as reported by the company increased to $923.1
million from $759.4 million in the year-ago quarter. Gross profit
increased to $194.2 million from $175.8 million in the prior-year
quarter. However, gross margin declined 140 basis points year over
year to 17.4% in the quarter.
Selling, general and administrative expenses increased to $102.3
million from $96.1 million in the year-ago quarter. Operating
income increased to $89.6 million from $75.7 million in the
year-earlier quarter, but this did not affect operating margin,
which remained at 8% in the reported quarter.
Segmental Performance
Consumer Packaging: first quarter sales amounted to $459 million
compared with $382 million in the year-earlier quarter. Operating
profit of $45.9 million was up slightly from $45.7 million in the
year-ago quarter.
The improvement in sales was due to last year’s acquisition of
Associated Packaging Technologies Inc. (APT), a
leading thermoform tray manufacturer for the frozen food industry,
besides higher selling prices, favorable currency translation and a
longer quarter. Operating profit improved due to decreased pension
cost and the impact of the longer quarter, which were offset by
higher labor and freight costs.
Tubes and Cores/Paper: Sales as reported by the segment were
$444 million versus $370 million in the year-earlier quarter, which
improved mainly due to higher selling prices, improved volume of
industrial converted products and recycled materials, favorable
currency translation and the longer quarter.
Operating profit of the segment increased to $28.6 million from
$21.5 million in the prior-year quarter. The increase is
attributable to the positive price/cost relationship, longer
quarter, decreased pension costs and productivity improvements
which were mitigated by higher energy and freight costs, along with
the negative impacts of mechanical and weather-related downtime in
certain global paper operations.
Packaging Services: Sales as reported by the segment were $121
million, an improvement from $112 million in the prior-year
quarter. The surge was mainly due to increased volume in contract
packaging and point of purchase displays, favorable foreign
exchange and longer quarter.
Operating profit for the segment amounted to $6.1 million up
from $5.1 million in the year ago-quarter.
All other Sonoco: Sales in this segment amounted to $93 million,
up from $72 million in the year-earlier quarter. The volume gains
in molded plastics and reels and spools, along with higher selling
prices, sales from a small acquisition and the longer quarter
account for the increase in segment sales.
Operating profit of the segment was $10.5 million versus $7.4
million in the year-ago quarter. As a result of improved volumes
and productivity gains, operating profit increased 42% on the
year-over-year basis, partially mitigated by negative price/cost
relationship and higher labor, energy and freight.
Financial Position
Cash and cash equivalent amounted to $185.2 million as of April
3, 2011 versus $158.2 million as of December 31, 2010.
Cash from operating activities was an outflow of $13.8 million
in the quarter versus an inflow of $73.8 million in the year-ago
quarter. The outflow indicates the company’s contribution of $85
million toward the company’s U.S. Pension plans.
Capital expenditure was $38.3 million versus $28.5 million in
the year-ago quarter, while dividends amounted to $28.1 million
compared with $27.1 million in the prior-year quarter.
The company also repurchased 1,305,000 shares of common stock
for approximately $46.3 million at an average price of $35.50,
completing a previously announced program to repurchase up to 2
million shares.
The company’s debt-to-total-capital ratio was 33.1%, compared
with 29.2% at the end of 2010.
Outlook
Sonoco now expects second quarter earnings in the range of 61
cents to 65 cents and for full year, earnings are projected in the
range of $2.52 to $2.60. The guidance also reflects the effective
tax rate of 31% for the full year.
Management believes that there will not be much change in the
level of sales except for seasonality and expects better second
quarter results due to stronger productivity, particularly in the
Tubes and Cores/Paper segment, as a result of less operating
downtime in the company’s mill system, improving price/cost
relationship and cost controls.
Our Take
We believe Sonoco’s strategy to grow through acquisitions,
potential restructurings and an increased focus on 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 #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.
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
SMURFIT-STN NEW (SSCC): Free Stock Analysis Report
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