Packaging

Sonoco Reports Third Quarter 2012 Results

Monday 22. October 2012 - Sonoco (NYSE: SON), one of the largest diversified global packaging companies, today reported financial results for its 2012 third quarter, ending September 30, 2012.

Third Quarter Highlights
— Third quarter 2012 GAAP earnings per diluted share were $.57, compared
with $.76 in 2011.
— Third quarter 2012 GAAP results include a $.02 per diluted share net
benefit stemming from gains on the sale of previously closed facilities
and insurance recoveries, partially offset by charges related to
previously announced restructuring activities. Third quarter 2011 GAAP
results included a $.10 per diluted share gain from a net release of
valuation allowances on deferred tax assets, partially offset by
restructuring charges and acquisition expenses.
— Base net income attributable to Sonoco (base earnings) for third quarter
2012 was $.55 per diluted share, compared with $.66 in 2011. (See base
earnings definition and reconciliation later in this release.) Sonoco
previously provided reduced third quarter base earnings guidance of $.51
to $.53 per diluted share.
— Third quarter 2012 net sales were a record $1.20 billion, up 6 percent,
compared with $1.12 billion in 2011.
— Third quarter 2012 cash flow from operations increased to $152 million,
compared with $100 million in 2011.
Earnings Guidance
— Guidance for full-year 2012 base earnings is revised to $2.17 to $2.21
per diluted share.
— 2012 free cash flow estimates are raised to $90 million from the
previous estimate of $70 million. (Free cash flow is cash flow from
operations minus net capital expenditures and dividends.)
Third Quarter Review
Commenting on the Company’s third quarter results, Chairman and Chief Executive Officer Harris E. DeLoach, Jr. said, “Although better than our revised guidance, we were disappointed with third quarter results as base earnings declined 16 percent from prior year results and base earnings before interest and taxes (EBIT) was off 6 percent. While base earnings benefitted from acquisitions, modest productivity gains and a positive price/cost relationship, these positive factors were more than offset by a negative change in the mix of business, higher maintenance, labor, pension, interest and other expenses along with the negative impact of a strong dollar.”
“We are encouraged that gross profits increased 10 percent over last year’s third quarter and that base earnings per diluted share came in better than the high end of our revised guidance issued in September. This improvement from our previous expectations was a result of slightly better operating performance, reduced incentive accruals and a lower effective tax rate.
“In our Paper and Industrial Converted Products segment, third quarter operating profits declined 13 percent due primarily to temporary operating problems experienced at several of our North American paperboard mills which resulted in greater than expected downtime and higher maintenance, freight and related expenses. Also negatively impacting year-over-year segment results for the quarter were higher pension and labor expenses, a slightly negative mix of business and a stronger dollar. These factors were partially offset by a positive price/cost relationship and modest gains made in productivity despite the unexpected downtime. Volume was up for the quarter, as narrow declines in global tubes and cores volume was offset by improved volume in our paper, reels and recycling operations.
“Our Consumer Packaging segment’s operating profits declined 16 percent in the quarter due to lower volumes across most of our packaging businesses along with a negative mix of business and higher labor, pension and other costs. These negative factors were partially offset by a positive price/cost relationship and productivity improvements. Operating profits from our Packaging Services segment improved 6 percent during the quarter due primarily to improved volume in international packaging fulfillment activity, which was partially offset by the impact of a stronger dollar.
“Operating profits in our Protective Packaging segment were up 216 percent year over year reflecting last year’s acquisition of Tegrant Holding Corporation. Tegrant was accretive by approximately $.02 per share in the quarter as we continue to successfully integrate operations and drive efficiencies.”
GAAP net income attributable to Sonoco in the third quarter was $58.8 million, or $.57 per diluted share, compared with $77.2 million, or $.76 per diluted share, in 2011. Base earnings were $56.3 million, or $.55 per diluted share, in the third quarter, compared with $67.1 million, or $.66 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 other items, if any, the exclusion of which the Company believes improves comparability and analysis of the underlying financial performance of the business.
Third quarter base earnings excludes income of $2.6 million, after tax, or $.02 per diluted share, representing gains from the sale of previously closed facilities and insurance recoveries totaling $6.4 million, after tax, or $.05 per share, partially offset by charges from previously announced restructuring activities of $3.8 million, after tax, or $.03 per share. Third quarter 2011 base earnings excluded net income of $10.1 million, after tax, or $.10 per diluted share, including an $18.8 million, after tax, or $.18 per share reduction in tax expense resulting from valuation allowance adjustments on deferred tax assets; restructuring expenses of $7.2 million, after tax, or $.07 per share, due to two plant closures; and acquisition-related costs of $1.5 million, after tax, or $.01 per share. 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 third quarter were $1.20 billion, compared with $1.12 billion in the same period in 2011. This 6 percent increase was due to sales from prior year acquisitions of $121 million, almost all of which is related to Tegrant, and improved volumes, particularly from Packaging Services and Paper and Industrial Converted Products segments. Partially offsetting these increases were lower selling prices and a $30 million negative impact from foreign currency translation.
Gross profits were $206 million in the third quarter of 2012, compared with $187 million in the same period in 2011. Gross profit as a percent of sales was 17.25 percent, compared with 16.6 percent in the same period in 2011. The improvement in total gross profits was due to the current year inclusion of Tegrant as the benefits in other businesses of a positive price/cost relationship and productivity improvements were offset by a negative shift in the mix of business and higher labor and other costs. The Company’s third quarter selling, general and administrative (SG&A) expenses increased 22 percent year over year, primarily due to the inclusion of Tegrant. SG&A expenses were 9.2 percent of net sales in the 2012 period, compared with 8.0 percent in 2011.
Cash generated from operations in the third quarter was $152 million, compared with $100 million in the same period in 2011. Operating cash flow improved year over year despite lower reported net income due to beneficial changes in working capital components and lower pension and postretirement contributions relative to reported expense. Capital expenditures, net of proceeds, and cash dividends were $40 million and $30 million, respectively, compared with $44 million and $29 million, respectively, during the same period in 2011.
Year-to-date Results
For the nine-month period of 2012, net sales increased 7 percent to $3.61 billion, compared with $3.37 billion in the same period of 2011. Net income attributable to Sonoco for the first nine months of 2012 was $153 million, or $1.49 per diluted share, compared with $188 million, or $1.84 per diluted share, in the same period of 2011. Earnings in the nine-month period of 2012 were negatively impacted by after-tax restructuring and other charges, net of gains from property sales and insurance recoveries, totaling $16.5 million, or $.16 per diluted share, compared with a net positive impact of $1.5 million, after tax, or $.02 per diluted share, in the same period in 2011, related to the deferred tax valuation allowance release and other previously discussed items.
Base earnings for the nine-month period of 2012 were $170 million, or $1.65 per diluted share, compared with $186 million, or $1.82 per diluted share, in the same period in 2011. This 9 percent year-over-year decline in base earnings stemmed from lower volume, a negative mix of business and higher pension, labor, freight and other expenses. These negative factors were partially offset by productivity improvements, acquisitions and a positive price/cost relationship.
Gross profit increased 12 percent year over year to $640 million, compared with $572 million in 2011, with the increase largely attributable to the inclusion of Tegrant. Gross profit as a percent of sales increased in the nine-month period of 2012 to 17.7 percent, compared with 17.0 percent in 2011.
For the nine-month period of 2012, cash generated from operations was $297 million, compared with $132 million in the same period in 2011. The year-over-year improvement reflects pension and postretirement benefit plan contributions of $64 million, compared with $124 million in the nine-month period of 2011, beneficial changes in working capital components and lower management incentives paid compared with last year. Capital expenditures, net of proceeds, and cash dividends were $142 million and $90 million, respectively, during the nine-month period of 2012, compared with $115 million and $86 million, respectively, for the same period in 2011.
At the end of the nine-month period of 2012, total debt was approximately $1.24 billion, a $50 million decrease from the Company’s year-end 2011 total debt of $1.29 billion. The Company’s debt-to-total capital ratio was 44.6 percent at the end of the third quarter, compared with 47.4 percent at both year-end 2011 and at second quarter of 2012. Cash and cash equivalents as of the end of the nine-month period of 2012 was $201 million, compared with $176 million at the end of the year.
On October 12, 2012, Sonoco took advantage of favorable market conditions to enter into a Third Amended and Restated Credit Agreement for a syndicated bank line of credit supporting its commercial paper program. The new $350 million agreement, which replaces the existing agreement of the same amount entered into October 18, 2010, has a new five-year maturity and includes a group of eight national and international banks. The Company had approximately $10 million drawn from the commercial paper program as of September 30, 2012, compared with $82 million drawn at the end of the second quarter.
Corporate
Net interest expense for the third quarter of 2012 increased to $14.9 million, compared with $8.3 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 for the third quarter of 2012 was 31.3 percent, compared with 3.1 percent for the same period in 2011. The effective tax rate was lower in 2011 due to the release of valuation allowances on deferred tax assets. The effective tax rate on base earnings was 31.5 percent and 29.1 percent in the third quarters of 2012 and 2011, respectively.
Full-Year 2012 Outlook
Sonoco expects 2012 annual base earnings to be in the range of $2.17 to $2.21 per diluted share and fourth quarter base earnings to be in the range of $.52 to $.56 per diluted share. For the full-year 2011, the Company reported base earnings of $2.29 per diluted share, while fourth quarter 2011 base earnings were $.46 per diluted share.
The Company’s revised base earnings guidance assumes sales demand will remain near current levels, adjusted for seasonality. 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, DeLoach said, “While we are projecting year-over-year improvement in base earnings in the fourth quarter, global economic conditions remain weak and our customers appear to be placing orders that only reflect their known demand. Overall, we do not expect any meaningful volume changes in our Industrial, Consumer and Protective Packaging businesses, beyond expected seasonality. However, due to the operational difficulties we experienced in our paper mills in the third quarter, which have since been resolved, we enter the fourth quarter with extremely tight uncoated recycled board inventories and plan to run our mill system full for the remainder of the year, except for scheduled downtime, such as holidays. In addition, we are continuing to implement contingency plans to further reduce costs in all of our businesses.”
“Despite the current economic uncertainty, Sonoco is well positioned to take advantage of any improvement in business conditions. We continue to maintain a strong financial position and generate strong operating cash flow which we are investing to optimize the profitability of our businesses, further reduce debt and provide solid cash dividends to our shareholders – as we have for 350 consecutive quarters over 87 years.”
Segment Review
The Company reports its financial results in four operating segments: Consumer Packaging, Paper and Industrial Converted Products, Packaging Services and Protective Packaging. 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.
Third quarter 2012 sales for the segment were $476 million, compared with $503 million in the third quarter of 2011. Segment operating profit was $43.8 million in the third quarter, compared with $52.4 million in the same quarter of 2011.
Year-over-year sales declined in the quarter due primarily to lower volumes in the Company’s global composite can, flexible packaging and rigid plastics businesses along with the unfavorable impact of foreign currency translation and lower sales prices. Operating profit in the segment declined 16 percent year over year as productivity improvements and a positive price/cost relationship were unable to offset negative volume and 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.
Third quarter 2012 sales for the segment were $454 million, compared with $484 million in the third quarter of 2011. Segment operating profit was $33.2 million in the third quarter, compared with $38.0 million in the third quarter of 2011.
The 6 percent year-over-year decline in third quarter sales was primarily due to the negative impact of foreign currency translation and lower recovered paper prices in the Company’s recycling operations. Operating profits declined by 13 percent year over year due to temporary operating problems experienced at several of our North American paperboard mills, higher pension, labor, freight and other costs and the negative impact of exchange rates. These negative factors were partially offset by a positive price/cost relationship and modest productivity improvements.
Packaging Services
The Packaging Services 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.
Third quarter 2012 sales for this segment were $125 million, compared with $113 million in the third quarter of 2011. Segment operating profit was $5.1 million in the quarter, compared with $4.8 million in the same quarter of 2011.
Sales increased 10 percent from last year’s third quarter due to volume growth, primarily in international packaging fulfillment activities. This improvement was partially offset by the negative impact of foreign currency translation. Operating profit for the segment increased 6 percent year over year due primarily to improved volumes associated with international packaging fulfillment activities, partially offset by a negative mix of business and the impact of a strong dollar.
Protective Packaging
The Protective Packaging segment includes the following products: custom-engineered, paperboard-based and expanded foam protective packaging; temperature-assurance packaging; and retail security packaging.
Third quarter 2012 sales were $141 million, compared with $24 million in the third quarter of 2011. Operating profit for the third quarter was $10.6 million, compared with $3.4 million in the third quarter of 2011.
The significant year-over-year growth in this segment’s sales and operating profits was due to the 2011 acquisition of Tegrant. Sales from the Company’s legacy protective packaging business were essentially flat year over year as improved volume offset lower selling prices. The year-over-year increase in segment operating profits reflects the impact of the Tegrant acquisition, which added $9.4 million in operating profits during the quarter. Operating profit for the Company’s legacy protective packaging business declined 10 percent year over year as slightly higher volume and productivity was more than offset by lower selling prices and higher pension and other expenses.