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Bemis Hurt by Lower Volumes

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Bemis Company Inc. (BMS - Free Report) reported third quarter 2011 earnings of 56 cents per share, a penny below the year-ago quarter and missing the Zacks Consensus Estimate by 2 cents. Reported EPS was at the lower end of the management’s guidance of EPS in the range of 56 cents to 61 cents. Unit volumes decreased in nearly every market category, adversely affected the company’s financial performance during the quarter.

Including charges related to acquisitions of 3 cents in the quarter and 1 cent in the prior year quarter, EPS in the quarter stood at 53 cents versus 56 cents in the prior year quarter.

Net sales improved 5% year over year to $1.36 billion, including a favorable impact of 2.3% from currency translation. Higher selling prices were offset by lower unit sales volumes net sales in the quarter marginally missed the Zacks Consensus Estimate of $1.37 million.

Gross profit decreased 8% year over year to $223.6 million, due to higher cost of products sold (8% to $1.13 billion). Operating income declined 13% to $112 million.

Segment Performance

Net sales from the Flexible Packaging segment amounted to $1.2 billion, up 6% year over year, driven by favorable currency translation and higher selling price of products, partially offset by lower unit sales volumes. Segment operating profit dropped to $119.1 million from $134.4 million due to higher raw material costs and lower unit volumes.

Net sales from the Pressure Sensitive Materials segment totaled $141.8 million, flat year over year due to lower volumes. Currency effects increased net sales by 3.8%. Segment operating profit was $8 million compared with $7.6 million recorded a year ago reflecting the impact of lower unit volumes offset by higher selling prices and lower period costs.

Financial Update

As of September 30, 2011, Bemis had cash and cash equivalents of $97.9 million compared with $72.7 million as of June 30, 2011. Total debt of the company was $1.6  billion at the end of the third quarter of 2011 versus $1.46 billion of debt at the end of the second quarter in 2011. Total cash flow from operating activities for the quarter ended September 30, 2011 was a record $169 million

Cash flow from operating activities was $250.5 million in the first nine months of 2011 compared with $253.7 million in the year-ago period.

Bemis purchased 1.2 million shares of its common stock in the quarter. Thus, as of September 30, 2011, the company had 4.5 million shares remaining under its current authorization.

2011 Guidance

Management expects adjusted EPS in the range of 36 cents to 42 cents for the fourth quarter of 2011 reflecting the negative impact of lower unit sales volumes. Fourth quarter severance charges associated with the optimization activities are expected to be in the range of 4 cents per share and will save about 6 cents per share in annualized costs beginning in 2012.  These optimization related costs are not included in management’s quarterly guidance. 

In addition, adjusted earnings per share for the full year 2011 are projected between $1.90 and $1.96. Capital expenditures are expected to be approximately $125 million for fiscal 2011.

Performance of Competitors

Bemis competes with the likes of Sealed Air Corporation (SEE) and Avery Dennison Corporation (AVY). Sealed Air reported its fiscal 2011 third quarter results posting an adjusted EPS of 48 cents versus 43 cents in the prior year quarter and a penny below the Zacks Consensus Estimate. Avery also reported third-quarter EPS of 48 cents, a 23% decline from the year-earlier quarter and below the Zacks Consensus Estimate of 59 cents.

Our Take

Bemis has adopted a disciplined business model to ensure efficiency and effectiveness in the face of weak demand experienced in the last two years. This initiative was taken to reduce operational costs and encourage savings and investments in prospective opportunities, and to pay back debt if the situation permits. Moreover, the company spends heavily in research and developmental activities to live up to the expectation of its existing customers as well as to attract new potential customers.

However, rising raw materials prices, have significantly impacted the company putting downward pressure on its margins. Further, lower volume levels remain point of concern. The shares of Bemis currently retain a Zacks #5 Rank (short-term Strong Sell rating).

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