Sonoco Reports Q2 Results
Friday, July 18, 2014
Press release from the issuing company
HARTSVILLE, S.C. - Sonoco, one of the largest diversified global packaging companies, today reported financial results for its second quarter ending June 29, 2014.
Second Quarter Highlights
Earnings Guidance Update
Second Quarter Review
Commenting on the Company's second quarter results, President and Chief Executive Officer Jack Sanders said, "Our balanced portfolio of businesses achieved record quarterly consolidated sales and gross profits and grew base earnings 7 percent over the prior year quarter, hitting an all time best for a second quarter. However, we were somewhat disappointed that base earnings only reached the low end of our guidance as strong performances in our Paper and Industrial Converted Products and Display and Packaging segments were partially offset by lower than expected results in our Consumer Packaging and Protective Solutions segments. Overall in the quarter, the Company benefitted from improvements to manufacturing productivity, a favorable price/cost relationship, lower pension expense and acquisitions. Partially offsetting these gains were higher labor, maintenance and other operating costs while volume was virtually flat."
"Earnings in our Paper and Industrial Converted Products segment challenged all-time highs with operating profits gaining 29 percent over the prior-year quarter on a positive price/cost relationship, productivity improvements and lower pension expense, which were partially offset by higher labor and other operating costs. Segment volume was essentially flat in the quarter despite a significant reduction in demand for steel reels for the oil and gas industry. In our Protective Solutions segment, operating profits declined 15 percent due to a negative price/cost relationship and higher labor, maintenance and other operating costs, somewhat offset by favorable changes in the mix of products sold."
"Operating profits in our Consumer Packaging segment declined 10 percent in the quarter due to lower volume and a negative mix of business along with higher labor, maintenance and other operating costs. Partially offsetting these negative factors were modest productivity improvements and lower pension expense. Operating profits in our Display and Packaging segment improved 24 percent from the prior-year quarter due primarily to volume growth in domestic display and fulfillment activity along with a favorable price/cost relationship and modest productivity improvements."
GAAP net income attributable to Sonoco in the second quarter was $61.5 million, or $.59per diluted share, compared with $55.0 million, or $.53 per diluted share, in 2013. Base earnings in the second quarter were $65.4 million, or $.63 per diluted share, compared with$60.8 million, or $.59 per diluted share, in 2013. 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.
Second quarter base earnings exclude $2.7 million in after-tax charges, or $.03 per diluted share, related to previously announced global restructurings and $1.2 million in after-tax charges, or $0.01 per diluted share, related to acquisition costs and non-base tax charges. Base earnings in the second quarter of 2013 excluded after-tax charges of $5.7 million, or$.06 per diluted share, stemming from asset impairment and restructuring costs associated with the closure of the Company's former thermoforming plant in Ireland and other restructuring activities. 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 second quarter were $1.25 billion, up approximately 2 percent, compared with $1.23 billion in last year's quarter. The increase was driven by $12.6 million in sales from businesses acquired during the past twelve months along with higher selling prices, partially offset by the negative impact of foreign exchange.
Gross profits were $232 million in the second quarter, up 4 percent, compared with $223 million in the same period in 2013. Gross profit as a percent of sales improved to 18.6 percent, compared with 18.1 percent in the same period in 2013. This 50 basis point improvement was due primarily to productivity improvements, a positive price/cost relationship and lower pension expense, partially offset by general inflation. The Company's second quarter selling, general and administrative expenses increased 4 percent to $126 million, due primarily to higher labor costs.
Cash generated from operations in the second quarter was $60 million, compared with$108 million in the same period in 2013. Operating cash flow was lower this quarter primarily due to a $15 million payment made to fund a proposed settlement of environmental claims and litigation associated with Fox River, higher cash taxes paid and changes in working capital. Net capital expenditures and cash dividends were $47 millionand $33 million, respectively, during the quarter, compared with $42 million and $31 million, respectively, during the same period in 2013. (Net capital expenditures is defined as capital expenditures minus proceeds from the disposal of capital assets.)
For the first six months of 2014, net sales were $2.43 billion, up 1 percent, compared with$2.41 billion in the first half of 2013. The increase was due to higher selling prices and acquisitions, partially offset by the negative impact of foreign exchange.
Net income attributable to Sonoco for the first six months of 2014 was $113.8 million, or$1.10 per diluted share, up 10 percent, from $103.1 million, or $1.00 per diluted share, in the same period in 2013. Earnings in the first half of 2014 were negatively impacted by after-tax restructuring charges of $4.3 million, or $.04 per diluted share, and acquisition costs and non-base income tax charges totaling $1.2 million after-tax, or $0.01 per diluted share. During the same period in 2013 earnings were negatively impacted by $9.3 million, or $.09per diluted share, of restructuring and other charges.
Base earnings for the first half of 2014 were $119.3 million, or $1.15 per diluted share, compared with $112.5 million, or $1.09 per diluted share for the same period in 2013. The 6 percent increase in base earnings stemmed from a positive price/cost relationship, productivity improvements, acquisitions and lower pension expense, partially offset by higher labor, maintenance, other operating costs and unfavorable changes in the mix of products sold.
Gross profit was $444 million in the first half of 2014, compared with $428 million in the same period in 2013. Gross profit as a percent of sales was 18.3 percent, compared with 17.8 percent for the same period in 2013.
For the first six months of 2014, cash generated from operations was $106 million, compared with $244 million in the same period in 2013. As expected, both operating cash flow and free cash flow were lower in the first half of 2014 as higher GAAP net income was more than offset by a normal change in working capital, higher income tax payments and pension contributions. In addition, cash flow was impacted by the funding of a proposed settlement of environmental claims and litigation associated with Fox River. Pension contributions were $54 million in the first half of 2014, compared with $25 million in the same period last year. Net capital expenditures and cash dividends were $82 million and$64 million, respectively, during the first half of 2014, compared with $97 million and $62 million, respectively, in 2013. The year-over-year decrease in capital expenditures is largely due to the completion in December of 2013 of a new biomass boiler in Hartsville, SC. Free cash flow for the first half of 2014 was negative $41 million, compared with $86 million in 2013. (Free cash flow is defined as cash flow from operations minus net capital expenditures and cash dividends). The Company also repurchased 649,237 shares for$27.1 million and expended approximately $11 million for the acquisition of a small tubes and cores business.
At June 29, 2014, total debt was approximately $1.0 billion, compared with $981 million atDecember 31, 2013, including outstanding commercial paper of $51 million and none, respectively. The Company's debt-to-capital ratio was 37.1 percent at June 29, 2014, compared with 36.3 at the end of 2013. Cash and cash equivalents were $200 million atJune 29, 2014, compared with $218 million at year end 2013.
Net interest expense for the second quarter of 2014 decreased to $13.1 million, compared with $14.4 million during the same period in 2013. The decrease was due to lower year-over-year debt levels. The 2014 second quarter effective tax rate on GAAP and base earnings was 33.9 percent and 33.2 percent, respectively, compared with 34 percent on both GAAP and base earnings for the prior year's quarter.
Third Quarter and Full-Year 2014 Outlook
Sonoco expects third quarter 2014 base earnings to be in the range of $.66 to $.70 per diluted share. The Company's third quarter 2013 base earnings were $.63 per diluted share. Annual 2014 base earnings guidance remains unchanged in the range of $2.43 to $2.53 per diluted share, and the Company continues to target $2.51 per diluted share. The Company's 2014 guidance reflects an expectation of a 33 percent effective tax rate for the year. Free cash flow is expected to be approximately $110 million in 2014, compared with$246 million in 2013. The year-over-year reduction reflects expectations for higher income tax payments, an increase in pension and post retirement plan contributions, funding of the proposed Fox River settlement and a greater, but more-normal, use of cash for working capital.
Although the Company believes the assumptions reflected in the range of guidance are reasonable, given uncertainty regarding the future performance of the overall economy and potential changes in raw material prices and other costs, as well as other risks and uncertainties, including those described below, actual results could vary substantially.
Commenting on the Company's outlook, Sanders said, "We bucked headwinds from severe weather in the first quarter and experienced tepid consumer spending for packaged food in the second quarter, but we remain optimistic for the balance of the year and expect to see year-over-year improvement in our industrial, consumer and protective solutions segments. We are very encouraged by the strong second quarter performance of our industrial-focused businesses and expect continued year over year operating improvement. In our consumer businesses, our customers remain optimistic that consumer demand will follow the normal seasonal pick up during the second half and we remain focused on driving productivity improvements more in line with historical levels. Price/cost headwinds in our protective solutions business are expected to ease in the second half and we expect seasonal volume improvement."
"Finally, our efforts to drive organic sales growth through the development of innovative solutions continue to gain momentum. We are currently working with our customers on more than a dozen projects utilizing our unique i6 Innovation Process™. By combining our broad technical expertise in material science, design, graphics management and supply chain capabilities with expanded market and consumer insights, we can accelerate the development of customized solutions that help our customers build new business."
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