Packaging

Sonoco Reports Fourth Quarter and Full-Year 2012 Results

Thursday 14. February 2013 - Sonoco (NYSE: SON), one of the largest diversified global packaging companies, today reported financial results for its fourth quarter and full-year 2012.

Fourth Quarter Highlights
— Fourth quarter 2012 GAAP earnings per diluted share were $.42, compared
with $.29 in 2011.
— Fourth quarter 2012 GAAP results include $.14 per diluted share in net
after-tax charges related to restructuring activities and taxes on the
repatriation of cash, partially offset by excess insurance settlement
gains. Fourth quarter 2011 GAAP results included 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.
— Base net income attributable to Sonoco (base earnings) for fourth
quarter 2012 was $.56 per diluted share, compared with $.46 in 2011.
(See base earnings definition and reconciliation later in this release.)
Sonoco previously provided fourth quarter base earnings guidance of $.52
to $.56 per diluted share.
— Fourth quarter 2012 net sales were a record $1.18 billion, up 4 percent,
compared with $1.13 billion in 2011.
Full-Year Results
— Full-year 2012 GAAP earnings per diluted share were $1.91, compared with
$2.13 in 2011.
— Full-year 2012 GAAP earnings include $.30 per diluted share in after-tax
restructuring charges and tax items, partially offset by excess
insurance settlement gains. In comparison, 2011 GAAP results include
$.16 per diluted share in after-tax restructuring charges, acquisition
expenses and acquisition inventory step-up costs, partially offset by
net positive adjustments to valuation allowances on deferred tax assets.
— Full-year 2012 base earnings were $2.21 per diluted share, compared with
$2.29 in 2011. Sonoco previously provided full-year 2012 guidance of
$2.17 to $2.21 per diluted share.
— Net sales reached a record $4.79 billion, up 6 percent, compared with
$4.50 billion in 2011.
— Free cash flow totaled $101.2 million in 2012, compared with a use of
cash of $31.9 million in 2011. (Free cash flow is defined as cash flow
from operations minus net capital expenditures and dividends.)
Increased 2013 Earnings Guidance and Debt Repayment
— Full-year 2013 base earnings guidance is expected to be $2.26 to $2.34
per diluted share, reflecting an improvement of $.02 per share, after
tax, in expected pension expense compared to prior guidance. Base
earnings for the first quarter of 2013 are estimated to be $.50 to $.54
per diluted share.
— 2013 free cash flow is projected to be approximately $130 million.
— In January 2013, Sonoco repaid the $135 million outstanding balance of
the term loan it incurred in conjunction with the 2011 Tegrant Holding
Corp. (Tegrant) acquisition, together with approximately $98 million of
commercial paper, using accumulated cash repatriated from outside the
United States.
Fourth Quarter Review
Commenting on the Company’s fourth quarter results, Chairman and Chief Executive Officer Harris E. DeLoach Jr. said, “Base earnings increased 21 percent over last year’s fourth quarter while gross profit improved 10 percent and base earnings before interest and taxes (EBIT) gained 7 percent. A lower effective tax rate drove a significant part of the base earnings improvement. The improvement in base EBIT stemmed from much stronger productivity, the addition of Tegrant and modest volume gains. These favorable factors were partially offset by a slightly negative price/cost relationship and higher maintenance, labor, pension, interest and other expenses.
“Operating profits from our Paper and Industrial Converted Products segment rose 23 percent in the fourth quarter as the segment generated its strongest fourth quarter earnings performance since 2007. The segment’s improvement was due to higher volume and strong productivity gains. Tons produced in the Company’s North America paperboard mills increased 7 percent with less downtime that aided productivity and helped offset a negative price/cost relationship stemming from rising recovered paper prices.
“Our Protective Solutions segment reported an 82 percent year-over-year improvement in operating profits during the fourth quarter driven largely by last year’s addition of Tegrant.
“Our Consumer Packaging segment continued to suffer from soft demand, reporting a 16 percent decline in operating profits. In addition to lower volumes across most of our consumer packaging businesses, segment operating profits were also impacted by higher labor, pension and other costs. These negative factors were partially offset by productivity improvements and a positive price/cost relationship. Operating profits from our Display and Packaging segment improved 165 percent for the quarter due primarily to an improved mix of business and productivity.”
GAAP net income attributable to Sonoco in the fourth quarter was $42.8 million, or $.42 per diluted share, compared with $29.5 million, or $.29 per diluted share, in 2011. Base earnings were $57.1 million, or $.56 per diluted share, in the fourth quarter, compared with $47.1 million, or $.46 per diluted share, in 2011. Base earnings and base earnings per diluted share are non-GAAP financial measures adjusted to remove restructuring charges, asset impairment charges, acquisition expenses and certain tax and other items, if any, the exclusion of which the Company believes improves comparability and analysis of the underlying financial performance of the business.
Fourth quarter 2012 base earnings excluded after-tax charges of $4.8 million, or $.05 per diluted share, stemming from previously announced restructuring activities and after-tax benefits of $1.2 million, or $.01 per diluted share, from insurance settlements and a favorable contingent purchase price adjustment. Also excluded was a net income tax charge of $10.8 million, or $.10 per diluted share, largely consisting of an $11.7 million tax expense related to the repatriation of accumulated offshore cash. Items excluded from base earnings in the 2011 fourth quarter included: restructuring expenses and impairment charges of $9.9 million, after-tax, or $.10 per diluted share, primarily due to several plant closures; acquisition-related costs of $4.3 million, after tax, or $.04 per diluted share; acquisition inventory step-up cost of $2.0 million, after tax, or $.02 per share; a $2.5 million after-tax gain, or $.02 per share, on insurance proceeds in excess of recognized fire damage property losses; and $3.9 million, or $.03 per diluted share, from deferred tax valuation increases related to plant closures.
Additional information about base earnings and base earnings per diluted share, along with reconciliation to the most closely applicable GAAP financial measures, is provided later in this release.
Net sales for the fourth quarter were $1.18 billion, compared with $1.13 billion in the same period in 2011. This 4 percent increase was due to $46 million of added sales from the prior year’s acquisition of Tegrant. Improved volumes, particularly in the Display and Packaging and Paper and Industrial Converted Products segments, were offset by lower selling prices, principally in the Paper and Industrial Converted Products segment.
Gross profits were $204 million in the fourth quarter of 2012, compared with $185 million in the same period in 2011. Gross profit as a percent of sales was 17.3 percent, compared with 16.4 percent in the same period in 2011. The improvement in total gross profits was due to the current year inclusion of Tegrant along with improved volume/mix and higher productivity which was partially offset by higher labor, pension and other costs. The Company’s fourth quarter selling, general and administrative (SG&A) expenses increased 6 percent year over year, primarily due to the inclusion of Tegrant. SG&A expenses were 9.5 percent of net sales in the 2012 period, compared with 9.4 percent in 2011.
Cash generated from operations in the fourth quarter was $111.4 million, compared with $113.4 million in the same period in 2011. Capital expenditures, net of proceeds from asset sales, and cash dividends were $44.8 million and $30.2 million, respectively, compared with $47.6 million and $29.0 million, respectively, during the same period in 2011.
2012 Results
Net sales for 2012 increased 6 percent to a record $4.79 billion, compared with $4.50 billion in 2011. Net income attributable to Sonoco for 2012 was $196.0 million, or $1.91 per diluted share, compared with $217.5 million, or $2.13 per diluted share, in 2011. Earnings in 2012 were negatively impacted by after-tax restructuring and acquisition charges, net of gains from property sales and excess insurance recoveries, totaling $20.1 million, or $.19 per diluted share and net income tax charges of $10.8 million, or $.11 per diluted share, relating primarily to the previously discussed repatriation of offshore cash. Earnings in 2011 were negatively impacted by $16.1 million, after tax, or $.16 per diluted share, due to the following: restructuring and impairment charges of $25.5 million, after tax, or $.25 per diluted share; acquisition-related costs of $6.6 million, after tax, or $.07 per diluted share; and acquisition inventory step-up costs of $2.0 million, or $.02 per share; offset by a $3.1 million after-tax gain, or $.03 per share, on insurance proceeds in excess of recognized fire damaged property losses; and a gain of $15.0 million, or $.15 per share, due to reduction in tax expense resulting from valuation allowance adjustments on deferred tax assets.
2012 base earnings were $226.9 million, or $2.21 per diluted share, compared with $233.6 million, or $2.29 per diluted share, in 2011. This 3 percent year-over-year decline in base earnings stemmed from lower volume, a negative mix of business and higher pension, labor and other expenses. These negative factors were partially offset by productivity improvements, acquisitions net of associated interest, and a positive price/cost relationship.
Gross profit increased 11.5 percent year over year to $844 million, compared with $757 million in 2011, with the increase largely attributable to the inclusion of Tegrant. Gross profit as a percent of sales increased in 2012 to 17.6 percent, compared with 16.8 percent in 2011.
Cash generated from operations in 2012 was $403.9 million, compared with $245.3 million in 2011. The year-over-year improvement reflects lower pension and postretirement benefit plan contributions which were $75.1 million in 2012 compared with $142.1 million in 2011. Beneficial changes in working capital components and lower management incentives paid compared to the prior year also contributed to the improvement. Capital expenditures, net of proceeds from asset sales, and cash dividends were $182.9 million and $119.8 million, respectively, during 2012, compared with $162.3 million and $115.0 million, respectively, in 2011. Free cash flow increased in 2012 to $101.2 million and was negative in 2011 by $31.9 million.
As of December 31, 2012, total debt was approximately $1.37 billion, an $86.4 million increase from the Company’s year-end 2011 total debt of $1.29 billion. Cash and cash equivalents as of the end of 2012 was $373.1 million, compared with $175.5 million at the end of 2011. The Company’s debt-to-total capital ratio was 47.7 percent at the end of 2012, compared with 47.4 percent at year-end 2011.
In December 2012, the Company recorded a transaction to repatriate a total of $260 million of accumulated offshore cash, recognizing $11.7 million of related tax expense. In January 2013, the Company received $233 million of those funds, using $135 million to pay off a term loan issued in November 2011 as part of the financing of the Tegrant acquisition and the remainder to pay down commercial paper. The Company expects to move the remaining $27 million during the balance of 2013 and use those funds to repay debt.
2012 Overview
According to DeLoach, “Our performance in 2012 was not what we expected when we began the year. We did not fully anticipate the negative impact that rising commodity costs would have on consumers’ spending for packaged food, or the extent to which the European recession and slowing emerging market economies would reduce demand in our industrial-related businesses. We also incurred some self-inflicted operating issues which increased costs and reduced productivity. That said, we generated record sales and gross profits in 2012 and significantly improved free cash flow. In addition, we made significant strides in integrating Tegrant and further expanding our new Protective Solutions segment.
“As we enter 2013, the global economic outlook remains cloudy. However, we have addressed our recent operating missteps and are poised to take advantage of any improvement in market conditions. The repatriation of offshore cash, and the related pay down of outstanding debt, provides us with improved financial flexibility to invest in the business and/or return cash to our shareholders. In addition, we expect to use free cash flow in 2013 to further reduce debt by about $120 million.”
Corporate
Net interest expense for the fourth quarter of 2012 increased to $14.5 million, compared with $12.8 million during the same period in 2011. The increase was due to higher debt levels as a result of the acquisition of Tegrant. The effective tax rate on GAAP earnings for the fourth quarter of 2012 was 44.4 percent, compared with 51.1 percent for the same period in 2011. These higher than normal rates reflect an $11.7 million additional current year tax expense associated with the repatriation of cash, while the prior year rate was negatively affected by a greater percentage of the Company’s income being generated in higher tax jurisdictions, the unfavorable effect of timing differences on the manufacturing deduction, and a deferred tax valuation adjustment related to restructuring. The effective tax rate on base earnings was 30.7 percent and 39.0 percent in the fourth quarters of 2012 and 2011, respectively. The variance in the annual tax rate on GAAP earnings between 36.1 percent in 2012 and 27.6 percent in 2011 is attributable primarily to taxes on dividends received from the Company’s foreign subsidiaries, which increased the 2012 rate, and favorable valuation allowance adjustments in 2011, which lowered last year’s rate.
First Quarter and Full-Year 2013 Outlook
Sonoco expects first quarter 2013 base earnings to be in the range of $.50 to $.54 per diluted share. The Company’s first quarter 2012 base earnings were $.52 per diluted share. Annual base earnings per diluted share are expected to be in the range of $2.26 to $2.34, with a projected midpoint of $2.30 per diluted share. The Company’s midpoint guidance assumes a $.22 per share improvement stemming from modest volume growth, productivity improvements and a slightly positive price/cost relationship. Offsetting these improvements is approximately $.11 in negative items, including an estimated $.07 per share impact from higher year-over-year pension expenses. Although the Company believes the assumptions reflected in the range of guidance are reasonable, given the uncertainty regarding the global economy and fluctuating raw material prices and other costs, actual results could vary substantially.
Commenting on the Company’s outlook, Jack Sanders, Sonoco’s president, chief operating officer and CEO-elect said, “The first quarter is historically our weakest quarter due to slow seasonal demand, particularly in the industrial-focused and Protective Solution businesses. We are projecting similar year-over-year results in the first quarter on expectations that global economic conditions will not significantly improve and consumer spending will remain sluggish. Until we have a clearer view of economic conditions, we will continue to develop and implement contingency plans to reduce costs in all of our businesses.”
Segment Review
Sonoco reports its financial results in four operating segments: Consumer Packaging, Paper and Industrial Converted Products, Display and Packaging, and Protective Solutions. Effective this quarter and for 2012, the Company has changed the name of the former Packaging Services segment to Display and Packaging and the former Protective Packaging segment to Protective Solutions to better reflect the segments’ business activities. Segment operating results do not include restructuring and asset impairment charges, acquisition expenses, interest income and expense, income taxes or certain other items, if any, the exclusion of which the Company believes improves comparability and analysis.
Consumer Packaging
Sonoco’s Consumer Packaging segment includes the following products and services: round and shaped rigid containers and trays (both composite and thermoformed plastic); blow-molded plastic bottles and jars; extruded and injection-molded plastic products; printed flexible packaging; metal and peelable membrane ends and closures; and global brand artwork management.
Fourth quarter 2012 sales for the segment were $464 million, compared with $485 million in the fourth quarter of 2011. Segment operating profit was $40.1 million in the fourth quarter, compared with $47.8 million in the same quarter of 2011.
Sales declined in the quarter due primarily to lower overall volumes and negative changes in product mix. Segment operating profit declined 16 percent in the quarter as productivity improvements were unable to offset negative volume and product mix changes along with higher pension, labor and other expenses.
Paper and Industrial Converted Products
The Paper and Industrial Converted Products segment includes the following products: high-performance paper and composite paperboard tubes and cores; fiber-based construction tubes and forms; wooden, metal and composite wire and cable reels and spools; and recycled paperboard, linerboard, corrugating medium, recovered paper and other recycled materials.
Fourth quarter 2012 sales for the segment were $448 million, compared with $452 million in the fourth quarter of 2011. Segment operating profit was $36.3 million in the fourth quarter, compared with $29.4 million in the fourth quarter of 2011.
Sales declined less than 1 percent in the fourth quarter as lower recovered paper prices in the Company’s recycling operations were offset by improved volumes in trade paper sales and recycling. Operating profits improved 23 percent year over year due to strong productivity improvement, volume gains and a positive change in the mix of business. These positive factors were partially offset by a negative price/cost relationship and higher pension, labor, freight and other costs.
Display and Packaging
The Display and Packaging segment includes the following products and services: designing, manufacturing, assembling, packing and distributing temporary, semipermanent and permanent point-of-purchase displays; supply chain management services, including contract packing, fulfillment and scalable service centers; and paper amenities, such as coasters and glass covers.
Fourth quarter 2012 sales for this segment were $130 million, compared with $109 million in the fourth quarter of 2011. Segment operating profit was $4.5 million in the quarter, compared with $1.7 million in the same quarter of 2011.
Sales increased 19 percent from last year’s fourth quarter due to low-margin volume growth, primarily in international packaging fulfillment activities. Quarterly operating profit for the segment increased 165 percent year over year due primarily to an improved mix of business as productivity improvements were offset by higher labor and other costs.
Protective Solutions
The Protective Solutions segment includes the following products: custom-engineered, paperboard-based and expanded foam protective packaging and components; temperature-assurance packaging; and retail security packaging.
Fourth quarter 2012 sales were $133 million, compared with $84 million in the fourth quarter of 2011. Operating profit for the fourth quarter was $9.5 million, compared with $5.2 million in the fourth quarter of 2011.
The year-over-year improvement in this segment’s quarterly sales and operating profits was attributable to Tegrant and largely driven by the timing of the acquisition. However, higher volume and an improved mix of business during the period following the anniversary of its November 8, 2011, acquisition also contributed to the improvement. Quarterly sales in the legacy protective packaging business were essentially flat, while operating profit improved fractionally year over year due to a slightly positive price/cost relationship.