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Sonoco Products Co. (SON - Analyst Report) reported first-quarter 2012 results with an adjusted earnings per share (EPS) of 52 cents compared with 57 cents in the year-ago quarter, exceeding the previous guidance range of 45 cents to 50 cents. The reported EPS comfortably surpassed the Zacks Consensus Estimate of 48 cents.

The quarter excluded a tax charge of 10 cents per share stemming from restructuring activities and impairment costs. The year-ago quarter excluded the after tax charge of 1 cent per share pertaining to restructuring as well as some other charges. Inclusive of these one-time items, EPS amounted to 42 cents versus 56 cents in the year-ago quarter.

Net sales increased 8.5% to $1.21 billion, beating the Zacks Consensus Estimate of $1.17 billion. The improvement in sales was attributable to acquisition of Tegrant Corp. and increase in selling prices partially offset by currency translation effect.

Costs and Margins

Cost of sales increased 7.8% to $995.5 million in the reported quarter. Gross profit at Sonoco increased 11.7% to $216.9 million, expanding gross margin by 50 basis points to 17.9%.

Selling, general and administrative expenses increased 20% to $122.8 million in the quarter. Sonoco’s adjusted operating income decreased to $94.2 million in the quarter from $91.2 million in the year ago quarter. Consequently, operating margins contracted 40 basis points to 7.8% in the quarter.  

Segment Performance

Net sales at the Consumer Packaging segment declined marginally to $495.8 million from $498.4 million in the year-ago quarter. The decline was due to unfavorable currency translation, lower volumes and divestiture of business in Brazil, offsetting the positive impact of higher selling prices.

Operating profit of the segment dropped 2.1% to $50.1 million. The decline was driven by increase in pension, labor cost and other expenses, coupled with negative effect of volume and mix. Consequently, operating margin contracted 20 basis points to 10.1% in the quarter.

Net Sales at the Paper and Industrial Converted Products segment decreased 1.6% to $463.6 million due to lower selling price, negative impact of business mix and currency translation. 

Operating profit at the segment increased 6.6% to $32.3 million. Operating margins also increased 60 basis points year over year to 7%.

Packaging Services reported that net sales decreased to $114.9 million. The decrease was due to loss of a customer packaging contract and foreign currency translation.

Operating profit declined 34% to $4.8 million in the quarter, driven by lower volumes. It was partially offset by an increase in retail merchandising and fulfillment business. Accordingly, operating margins decreased 110 basis points year over year to 4.2% in the quarter.

Protective Packaging segment's net sales increased significantly to $138.1 million from $24.3 million in the year-earlier quarter. The improvement was driven entirely due to the Tegrant acquisition.

Operating profit at the segment rose 117.7% to $5.2 million as a result of acquisition of Tegrant, improvement in productivity and positive price-cost relationship. However, operating margins contracted 820 basis points year over year to 5.1% in the quarter.

Financial Position            

As of April 1, 2012, cash and cash equivalents were $176.1 million, up from $175.5 million as of December 31, 2011. Cash flow from operating activities were $101.0 million during first quarter of 2012 compared with a cash outflow of $13.8 million in the prior year quarter.

The company’s debt-to-total-capital ratio decreased marginally to 45.8% as of April1, 2012, compared with 46% as of December 31, 2011.

Outlook

Sonoco guides its second quarter EPS in the range of 55 cents to 60 cents. The company revised the full year EPS upwards in the range of $2.34 to $2.44 from the previous guidance of $2.32 to $2.42.

Our View

The company has continued with its strategy of growing through acquisitions. It acquired two companies in November - American Recycling and Tegrant. Moreover, after the acquisition of Tegrant it formed a totally new segment - Protective Packaging. It expects that the segment will generate sales of nearly $560 million in 2012.

However, escalating raw material costs of resin, films and other materials remain a concern for the company. It also faces competition from companies like Bemis Company, Inc. (BMS - Analyst Report) and Rock-Tenn Co. (RKT - Analyst Report).           

We currently have a long-term neutral recommendation on Sonoco. The stock retains a short-term Zacks #3 Rank (Hold).

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