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Sonoco Reports Q3, Sees Flexible Packaging Growth

Friday, October 18, 2013

Press release from the issuing company

HARTSVILLE, S.C. - Sonoco, one of the largest diversified global packaging companies, today reported financial results for its third quarter that ended September 29, 2013.

Third Quarter Highlights

  • Third quarter 2013 GAAP earnings per diluted share were $.59, compared with $.57 in 2012.
  • Third quarter 2013 GAAP results include $.04 per diluted share in after-tax charges related to restructuring activities, primarily previously announced plant closures. Third quarter 2012 GAAP results included a $.02 per diluted share benefit from gains on the sale of previously closed facilities and property insurance recoveries, partially offset by restructuring activities.
  • Base net income attributable to Sonoco (base earnings) for third quarter 2013 was $.63 per diluted share, compared with $.55 in 2012. (See base earnings definition and reconciliation later in this release.) Sonoco previously provided third quarter base earnings guidance of $.59 to $.63 per diluted share.
  • Third quarter 2013 net sales were a record $1.23 billion, up 3 percent, compared with $1.20 billion in 2012.
  • Cash flow from operations was $177 million, compared with $152 million in 2012. Free cash flow for the third quarter was $101 million, compared with $82 million in 2012. (Free cash flow is defined as cash flow from operations minus net capital expenditures and cash dividends. Net capital expenditures is defined as capital expenditures minus proceeds from the disposal of capital assets.)

Earnings Guidance Update

  • Fourth quarter 2013 base earnings are expected to be $.55 to $.59 per diluted share.
  • Guidance for full-year 2013 base earnings was updated to $2.27 to $2.31 per diluted share.
  • Free cash flow for full-year 2013 increased to $190 million from previous guidance of $150 million.

Third Quarter Review
Commenting on the Company's third quarter results, Sonoco President and Chief Executive Officer Jack Sanders said, "Our diverse packaging solutions portfolio delivered the strongest quarter in two years with sales and gross profits again reaching records, while base earnings met the high end of our guidance. Despite tepid global economic conditions, we grew base earnings for the quarter nearly 16 percent year over year on strong productivity improvements, volume gains and a slightly positive price/cost relationship. These positive factors were partially offset by higher labor and other operating costs."

"Operating profits from our Consumer Packaging segment increased 12 percent over the prior year's third quarter due to a positive price/cost relationship and productivity improvements, partially offset by lower volume. In addition, operating profits from our Display and Packaging segment improved 74 percent in the quarter as strong volume growth more than offset higher operating costs."

"Third quarter operating profits improved 14 percent in our Paper and Industrial Converted Products segment as strong productivity improvements and modest volume growth more than offset higher labor and other costs."

"Our Protective Solutions segment reported a 7 percent decline in operating profits during the third quarter as the benefit of higher sales volumes were offset by changes in the overall sales mix and productivity gains were offset by higher labor and other operating expenses, including expenses associated with the start up of new operations."

GAAP net income attributable to Sonoco in the third quarter  was $61.2 million, or $.59 per diluted share, compared with $58.8 million, or$.57 per diluted share, in 2012. Base earnings were $65.1 million, or $.63 per diluted share in the third quarter, compared with $56.3 million, or $.55 per diluted share, in 2012. 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 excluded $.04 per diluted share in after-tax charges related to restructuring activities, including previously announced plant closures in Ireland and Canada.  Base earnings in the third quarter of 2012 excluded income of $2.6 million, after tax, or$.02 per diluted share, representing gains from property insurance recoveries totaling $2.0 million, after tax, and net restructuring related gains from previously announced restructuring activities of $0.6 million, after tax.  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 $1.23 billion, compared with $1.20 billion in the same period in 2012. This 3 percent improvement was driven by gains in volume and mix from the Company's Display and Packaging, Paper and Industrial Converted Products and Protective Solutions segments along with higher selling prices. These improvements were offset by a decline in Consumer Packaging segment volume and the divestiture of a small box plant.

Gross profits were a record $224 million in the third quarter, compared with $206 million in the same period in 2012. Gross profit as a percent of sales improved to 18.25 percent, compared with 17.25 percent in the same period in 2012. This 100 basis point improvement was due to strong productivity gains, volume growth and a positive price/cost relationship, partially offset by higher maintenance, labor and other costs. The Company's third quarter selling, general and administrative expenses increased 7 percent to $118 million due primarily to wage inflation and slightly higher management incentives, compared with the previous year.

Cash generated from operations in the third quarter was $177 million, compared with $152 million in the same period in 2012. Operating cash flow was up during the quarter reflecting an increase in current quarter payroll accruals, due to timing, and changes in deferred income taxes. These positive impacts to cash flow were partially offset by working capital changes, which required a use of cash in the current quarter but were a benefit during the third quarter of 2012.  Net capital expenditures and cash dividends were $44 million and $31 million, respectively, during the quarter compared with $40 million and $30 million, respectively, during the same period in 2012.

Year-to-date Results
For the first nine months of 2013, net sales were up about 1 percent to $3.63 billion, compared with $3.61 billion in the same period of 2012. Net income attributable to Sonoco for the first nine months of 2013 was $164.4 million, or $1.59 per diluted share, compared with$153.2 million, or $1.49 per diluted share, in the same period of 2012.

Earnings in the first nine months of 2013 were negatively impacted by after-tax restructuring and other charges of $13.2 million, or $.13 per diluted share, compared with $16.5 million, or $0.16 per diluted share, in the same period in 2012, also resulting from restructuring and other charges, net of gains from property sales and property insurance recoveries.

Base earnings for the first nine months of 2013 were $177.6 million, or $1.72 per diluted share, compared with $169.7 million, or $1.65 per diluted share, in the same period of 2012. The nearly 5 percent improvement in base earnings stemmed from productivity improvements, a positive price/cost relationship and modest volume growth, partially offset by higher labor, maintenance, pension and other expenses.

Gross profit was a record $652 million in the first nine months of 2013, compared with $640 million in the same period in 2012. Gross profit as a percent of sales was 18.0 percent, compared with 17.7 percent for the same period in 2012.

For the first nine months of 2013, cash generated from operations was a record $421 million, compared with $293 million in the same period in 2012. The improvement in cash flow from operations was due to higher earnings, working capital changes and lower pension and postretirement benefit plan contributions, which were $31 million in the first nine months of 2013, compared with $64 million in the same period in 2012. Net capital expenditures and cash dividends were $141 million and $93 million, respectively, during the first nine months of 2013, compared with $138 million and $90 million, respectively, in 2012. Free cash flow was $187 million for the first nine months, compared with $65 million in the same period last year.

At September 29, 2013, total debt was approximately $1.10 billion, a $270 million reduction from the Company's year-end total of $1.37 billion. In the first nine months of 2013, the Company repatriated $260 million of accumulated offshore cash, of which $135 million was used to pay off a term loan. The remainder was used to pay down commercial paper and/or fund the normal cash needs of the Company. The Company had no commercial paper outstanding at the end of the third quarter of 2013, compared with $152 million at December 31, 2012. The Company's debt-to-total capital ratio was 40.8 percent at September 29, 2013, compared with 47.7 percent at the end of 2012 and cash and cash equivalents were $287.6 million, compared with $373.1 million at year-end 2012.

Corporate
Net interest expense for the third quarter of 2013 decreased to $14.3 million, compared with $14.9 million during the same period in 2012. The decrease was due to lower year-over-year debt levels. The third quarter 2013 effective tax rate on GAAP and base earnings was 31.5 percent and 31.3 percent, respectively, compared with 31.2 percent and 31.3 percent, respectively, for the same period in 2012.

Fourth Quarter 2013 Outlook
Sonoco expects fourth quarter 2013 base earnings to be in the range of $.55 to $.59 per diluted share. The Company's fourth quarter 2012 base earnings were $.55 per diluted share. Annual base earnings per diluted share are expected to be in the range of $2.27 to $2.31, compared with the previous estimate of $2.26 to $2.32. Free cash flow is expected to be approximately $190 million for 2013, which is a$40 million increase over previous estimates of $150 million. The Company's base earnings guidance assumes modest volume growth compared to prior year and productivity improvements and higher year-over-year pension and other 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, Sanders said, "We are cautious entering the final quarter of 2013 due to the tremendous uncertainty surrounding weak global economic indicators and the current political gridlock in Washington. We remain focused on optimizing our portfolio of businesses by working to boost productivity, improving underperforming operations and managing margins by offsetting higher raw material cost inflation by implementing necessary price increases. Furthermore, we expect to complete our commitment to de-leverage our balance sheet by paying off approximately $118 million in 6.5 percent bonds maturing in November with available cash."

Segment Review

Sonoco reports its financial results in four operating segments: Consumer Packaging, Display and Packaging, Paper and Industrial Converted Products, and Protective Solutions. 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; global brand artwork management; and metal and peelable membrane ends and closures.

Third quarter 2013 sales for the segment were $473 million, compared with $476 million in 2012. Segment operating profit was $49.0 million in the third quarter, compared with $43.8 million in the same quarter of 2012.

The slight decline in sales was due primarily to lower volume in metal ends, and thermoformed and injection-molded plastic products, largely offset by volume growth in flexible packaging and blow-molded plastics. Segment operating profit increased 12 percent due to a positive price/cost relationship and productivity improvements, which were partially offset by lower overall volume.

Display and Packaging
The Display and Packaging segment includes the following products and services: designing, manufacturing, assembling, packing and distributing temporary, semi-permanent 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 2013 sales for this segment were $143 million, compared with $125 million in 2012. Segment operating profit was $8.9 million in the quarter, compared with $5.1 million in the same quarter of 2012.

Sales increased 15 percent from last year's third quarter due to volume growth in U.S. display and packaging and international contract packaging activities. Quarterly operating profit for the segment increased 74 percent year over year on volume growth and an improved mix of business in global display and packaging activities, which was partially offset by higher labor and other costs.

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; wooden, metal and composite wire and cable reels and spools; and recycled paperboard, linerboard, corrugating medium, recovered paper and other recycled materials.

Third quarter 2013 sales for the segment were $468 million, compared with $454 million in 2012. Segment operating profit was $37.7 million in the third quarter, compared with $33.2 million in 2012.

The 3 percent increase in sales was due to higher selling prices, primarily associated with a year-over-year increase in recovered paper costs, and volume and mix gains in North American and European industrial businesses. Operating profits rose 14 percent year over year due to strong productivity improvements, volume gains and business interruption insurance proceeds, partially offset by higher maintenance, 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.

Third quarter 2013 sales were $143 million, compared with $141 million in 2012. Operating profit was $9.9 million, compared with $10.6 million in the third quarter of 2012.

This segment's slight quarterly sales improvement was due to volume growth in the industrial and consumer protective businesses, offset by the divestiture of a small box plant and volume declines in retail security packaging. Operating profits declined nearly 7 percent as higher sales volumes were offset by changes in the overall sales mix and productivity improvements were more than offset by higher labor and other operating costs, including the start-up of a small plant in Mexico.

 

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Label & Packaging Editor

Jennifer Matt

Patrick Henry, Section Editor
Pat has covered graphic communications for nearly 30 years as a reporter, an editor, and a commentator.

 

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