Bemis' Rev Unblemished, EPS Falls - Analyst Blog

Bemis Company Inc. (BMS) reported first-quarter adjusted EPS of 47 cents, falling short of the Zacks Consensus Estimate of 52 cents and disappointing management's guidance of 50 cents to 55 cents per share. On a year-over–year basis, EPS dipped 2% or a penny from 48 cents per share affected by increases in the cost of specialty resin raw materials, particularly in the Flexible Packaging segment.

The reported quarter's adjusted EPS matched the reported EPS. However, the year-ago period's EPS excluded expenses related to the purchase accounting for inventory and order backlog of 7 cents, transaction costs pertaining to the acquisition of Alcan Food Packaging Americas of 8 cents and the financing impact of 6 cents for the aforesaid acquisition. Including these items, EPS stood at 27 cents in the year-earlier quarter.

Revenue

Bemis generated total revenue of $1.32 billion in the quarter, up 30% year over year, and above the Zacks Consensus Estimate of $1.28 billion. The acquisition of the Alcan Packaging Food Americas business boosted revenues by 19% while currency effects contributed 2% to the growth.

Cost & Margin Performance

Cost of products sold increased 31% to $1,094 million and, as a percentage of revenue, increased 80 basis points to 82.6%. Even though gross profit went up 24% to $229.8 million, gross margin dipped 80 basis points to 17.4%.

Selling, general and administrative expenses were $126 million, up 18% year over year. As a percentage of revenue, selling, general and administrative expenses dipped 100 basis points to 9.5%. Operating profit in the quarter was $103.2 million, up 59% over the prior-year period while operating margin was 7.8%, a 150-basis point expansion year over year.

Segment Update

Flexible Packaging: Sales improved 34% year over year to $1,179.4 million in the quarter. The acquisition of the Food Americas business accounted for 22% growth in the quarter. Positive currency effects increased net sales by 3% and higher selling prices coupled with increased unit sales volume and improved sales mix also led to the revenue growth. 

The segment reported an adjusted operating profit of $116.3 million, a 10% climb from $105.9 million in the prior-year quarter. Segment margin contracted 210 basis points to 9.9% reflecting the impact of dramatic raw material cost increases that began during the fourth quarter of 2010 and continued into the first quarter as well.

Pressure Sensitive Materials: Segment sales increased 3% to $145 million in the quarter. Adjusted operating profit at the segment was $9.9 million, up 50% from the prior-year quarter and segment margin improved 210 basis points to 6.8% from the year-ago quarter reflecting the benefits of higher selling prices in line with raw material cost increases and prudent cost management.

Financial Update

As of March 31, 2011, Bemis had cash and cash equivalents of $56.1 million, compared with $60.5 million as of December 31, 2010. Net cash used in operating activities during the quarter was $8.2 million compared with $3.2 million of cash flow generated from the prior-year quarter.

As of March 31, 2011, the debt-to-capitalization ratio rose to 43% from 40.6% as of December 31, 2010. Bemis' total debt as of March 31, 2011 was $1.4 billion, an increase of $134 million from $1.3 billion as of December 31, 2010.  Higher cost of raw materials increased inventory levels while higher selling prices increased accounts receivable during the first quarter. 

The increase in outstanding debt reflects the use of cash to support these higher levels of working capital, as well as fund share repurchases. Bemis repurchased $1.7 million of its common stock during the quarter. The remaining share repurchase authorization as of March 31, 2011 was 7.9 million shares.

Bemis increased its quarterly dividend by 4.3% from 23 cents per share to 24 cents per share in the quarter.

2011 Guidance

Management expects EPS for the second quarter of 2011 to be in the range of 48 cents to 54 cents. The company has however reduced its fiscal 2011 guidance to a range of $2.15 to $2.30 per share from the previous $2.33 to $2.48 per share taking into account increased raw material costs in the first half of the year. 

Recent political events and supply shortages have increased the speed and magnitude of specialty resin costs, which have affected the Flexible Packaging segment's results. The company expects the scenario to continue in the second quarter as well.

However, operating results for the second half of the year are expected to improve as most selling prices would have been adjusted to counter the raw material cost increases and benefits from production efficiencies resulting from optimization initiatives.

Our Take

Bemis has successfully grown through acquisitions. Its latest acquisition of the Food Americas operations of Alcan Packaging in March has expanded its global presence by adding Food Americas flexible packaging facilities in the United States, Canada, Mexico, Brazil, Argentina and New Zealand to its kitty. The acquisition has instantly aided results in the quarter.

The contribution from the Food Americas acquisition and related cost savings synergies, research and innovations, efficient business techniques to reduce its operational costs and encourage savings, strength in demand for packaging products have all helped position the company to post solid results in the upcoming quarters. However, higher pension expense and raw material cost pressures remain nagging concerns. The shares currently retain a Zacks #4 Rank (short-term Sell recommendation) on the stock.

Neenah, Wisconsin-based Bemis Company is a major supplier of flexible packaging and pressure sensitive materials used by leading food, consumer products, health care and other firms worldwide. Bemis competes with Avery Dennison Corporation (AVY), Amcor Ltd. (AMCRY) and privately held Printpack, Inc.