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Sonoco Posts Mixed 4Q

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Sonoco Products Co.’s (SON - Free Report) fourth-quarter 2012 adjusted earnings of 56 cents per share compared with 46 cents in the year-ago quarter. Earnings came in at the upper end of the company’s guidance range of 52 cents to 56 cents. Reported earnings were ahead of the Zacks Consensus Estimate of 54 cents per share.
The quarter excluded 14 cents per share of net after-tax charges related to restructuring activities and taxes on the repatriation of cash, partially offset by excess insurance settlement gains. The year-ago quarter excluded a net after-tax charge of $.17 per diluted share related to restructuring activities, acquisition items and income tax reserve adjustments, partially offset by excess insurance settlement gains. Including these items, fourth-quarter 2012 earnings stood at 42 cents per share compared to 29 cents in the year-ago quarter.
Net sales increased 4% to a record $1.176 billion but fell short of the Zacks Consensus Estimate of $1.182 billion. The year-over-year improvement in sales was attributable to incremental revenues of $46 million from the Tegrant acquisition and higher volumes especially from Display and Packaging and Paper and Industrial Converted Products segments. These benefits were partially offset by lower selling price, mainly in the Paper and Industrial Converted Products segment. 
Costs and Margins
Cost of sales increased 3% to $972 million in the reported quarter. Gross profit at Sonoco went up 10% to $204 million while gross margin expanded 90 basis points (bps) to 17.3%.
Selling, general and administrative expenses increased 6% to $112 million in the quarter. Sonoco’s adjusted operating income increased 17% to $92 million in the quarter from $79 million in the year-ago quarter. Operating margin expanded year over year 800 bps to 7.8%.
Segment Performance
Net sales at the Consumer Packaging segment dropped 4.4% to $464 million, hurt by lower volumes. Operating profit of the segment also declined 16% to $40.1 million. The decline was driven by lower volumes as well as higher pension, labor as well as other expenses, partially offset by improvements in productivity and positive price/cost mix. 
Net Sales at the Paper and Industrial Converted Products segment dipped 1% to $448 million. However, operating profit at the segment increased 23% to $36 million, driven by higher volume and strong productivity gains. 
Display and Packaging segment’s net sales increased 19% to $130 million from $109 million in the year-earlier quarter. Operating profit soared 165% to $4.5 million in the quarter, mainly due to an improved mix of business and productivity.
Protective Solution segment’s net sales shot up 60% to $133.5 million. The increase was mainly driven by Tegrant acquisition. Operating profit at the segment saw an increase of 82% to $9.5 million.
Fiscal 2012 Performance
Sonoco reported adjusted earnings of $2.21 per share compared with $2.29 in 2011 and were at the upper end of management’s guidance of $2.17 to $2.21. Reported earnings beat the Zacks Consensus Estimate of $2.19 per share. Net sales increased 6% to a record $4.786 billion.
Financial Position
As of Dec 31, 2012, cash and cash equivalents were $373 million, up from $175.5 million as of Dec 31, 2011. Cash flow from operating activities was $403.9 million during 2012 compared with $245 million in the prior year. The company’s debt-to-total-capital ratio stood at 47.7% as of Dec 31, 2012 compared with 47.4% as of Dec 31, 2011.
Sonoco expects first quarter 2013 earnings per share to lie in the range of 50 to 54 cents per share. It guided full year earnings in the range of $2.26 to $2.34 per share.
Our View
Organic sales growth, geographic expansion and strategic acquisitions remain growth drivers for the company. However, volatile raw material prices and uncertainty among its customers given the slow recovery in the U.S and ongoing European weakness, higher pension costs remain headwinds for the company. Sonoco currently retains a short-term Zacks Rank #4 (Sell). 
Among the peers of Sonoco, Packaging Corporation of America (PKG - Free Report) reported fourth quarter adjusted income of 61 cents per share compared to 40 cents per share in the year-ago quarter. Bemis Company, Inc. (BMS - Free Report) reported fourth quarter 2012 adjusted earnings of 52 cents per share, up 7% from 45 cents earned in the year-ago quarter. On the other hand, Sealed Air Corporation (SEE - Free Report) is yet to announce its fourth quarter results.

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