HARTSVILLE, S.C. - Sonoco, one of the largest diversified global packaging companies, today reported record base financial results for its fourth quarter and full-year 2014.
Fourth Quarter Highlights
- Fourth quarter 2014 GAAP earnings per diluted share were $.53, compared with $.53 in 2013.
- Fourth quarter 2014 GAAP results include $.13 per diluted share, after-tax, in asset impairments and restructuring charges, along with acquisition expenses and acquisition inventory step-up costs. Fourth quarter 2013 GAAP results included after-tax charges of$.05 per diluted share related to restructuring costs from international plant closures.
- Base net income attributable to Sonoco (base earnings) for fourth quarter 2014 was a record $.66 per diluted share, up 14 percent, compared with $.58 in 2013. (See base earnings definition and reconciliation later in this release.) Sonoco's most recently provided fourth quarter base earnings guidance was to be at or above $.59 to $.64 per diluted share.
- Base earnings in the quarter included approximately $.03 per diluted share, after tax, from the recovery of previously incurred excess costs related to a flexible packaging materials issue.
- Fourth quarter 2014 net sales were a record $1.32 billion, up 8 percent from $1.22 billionin 2013.
- Cash flow from operations for the fourth quarter was $151 million, compared with $117 million in 2013. Free cash flow was $78 million, compared with $58 million in 2013. (See free cash flow definition later in this release.)
- Completed the $355 million acquisition of Weidenhammer Packaging Group significantly expanding Sonoco's position in the European composite can market.
Full-Year 2014 Highlights
- Full-year 2014 GAAP earnings per diluted share were $2.32, up 9 percent, compared with$2.12 in 2013.
- Full-year 2014 GAAP results include $.22 per diluted share in after-tax impairments and restructuring charges, acquisition expenses and acquisition inventory step-up costs, partially offset by excess property insurance proceeds. In comparison, 2013 GAAP results included $.18 per diluted share in after-tax restructuring charges primarily related to plant closures.
- Full-year 2014 base earnings were a record $2.54 per diluted share, up 10 percent, compared with $2.30 in 2013. Most recently, Sonoco guided full-year base earnings to be at or above the Company's target of $2.51 per diluted share.
- Cash flow from operations for 2014 was $418 million, compared with $538 million in 2013. Free cash flow was $120 million, in line with our previously communicated expectation of$110 million, compared to $245 million in 2013.
2015 Earnings Guidance Update
- Full-year 2015 base earnings are projected to be in the range of $2.60 to $2.70 per diluted share and the Company is targeting $2.65.
- Base earnings for the first quarter of 2015 are projected to be $.56 to $.61 per diluted share. Base earnings in the first quarter of 2014 were $.52.
- 2015 free cash flow is projected to be approximately $150 million.
Fourth Quarter Comments and Financial Summary
Commenting on the Company's fourth quarter results, President and Chief Executive OfficerJack Sanders said, "Sonoco's balanced portfolio of businesses showed strong improvement during the fourth quarter in a number of areas. Consolidated sales grew 8 percent to a new record due to the combination of volume gains and a major acquisition. Gross profits and base earnings also reached records for the quarter, driven by solid volume growth, strong manufacturing productivity, a positive price/cost relationship and lower pension expense. Quarterly results were also aided by the reimbursement of excess costs incurred in prior quarters related to a materials issue in our flexible packaging business. Each of the Company's segments reported improved operating profits despite higher year-over-year labor, maintenance, management incentive and other costs. "
"Our Consumer Packaging segment reported record results in the quarter with operating profits up 21 percent over last year's quarter due primarily to productivity improvements, volume growth throughout the segment and lower pension expense. Current quarter results reflect the flexible packaging excess cost reimbursement which benefitted productivity. In addition, the Weidenhammer Packaging Group acquisition completed on October 31, 2014, provided modest accretion to operating profits, which excludes acquisition-related inventory step-up charges. Operating profits in our Display and Packaging segment rose 49 percent in the quarter due primarily to strong volume growth in U.S. display and international packaging fulfillment activity and manufacturing productivity improvements."
"Operating profits in our Paper and Industrial Converted Products segment exceeded the prior year quarter by nearly 11 percent due primarily to volume growth, a positive price/cost relationship and modest manufacturing productivity improvements, and lower pension expense, partially offset by higher operating costs and incentives. Excluding South Americaand Asia, the Company experienced volume gains throughout the segment. In our Protective Solutions segment, operating profits increased more than 10 percent due to volume growth in temperature-assured products, consumer protective packaging and automotive components, along with modest productivity improvements."
GAAP net income attributable to Sonoco in the fourth quarter was $54.5 million, or $.53 per diluted share, compared with $54.7 million, or $.53 per diluted share, in 2013. Base earnings in the fourth quarter were $67.9 million, or $.66 per diluted share, compared with $59.9 million, or $.58 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.
Fourth quarter base earnings exclude $8.8 million in after-tax charges, or $.09 per diluted share, related to restructurings and asset impairment costs and $4.7 million in after-tax charges, or $0.04 per diluted share, related to acquisition expense and acquisition inventory step-up costs. Base earnings in the fourth quarter of 2013 excluded after-tax charges of $.06per diluted share related to international restructuring actions and $.01 per diluted share in after-tax gains from property insurance settlements. 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 $1.32 billion, up 8.5 percent, compared with $1.22 billion in last year's quarter. The increase was driven by a 6 percent increase in company-wide volume and $64.4 million in sales from businesses acquired during the past twelve months, including $52.2 million from the Weidenhammer acquisition. The year-over-year sales improvement was reduced approximately $32 million by the negative impact of foreign currency translation.
Gross profit was a record $250 million in the fourth quarter, up 12.8 percent, compared with$221 million in the same period in 2013. Gross profit as a percent of sales increased to 18.9 percent, compared with 18.2 percent in the prior year period. These increases were due primarily to volume growth, productivity improvements and lower pension expense, which were partially offset by operating cost inflation. The Company's fourth quarter selling, general and administrative expenses were $146 million, or 11.1 percent of sales, compared with $127 million, or 10.5 percent of sales, in the prior year quarter. These increases were largely attributable to acquisition costs as well as higher labor and management incentive costs.
Cash generated from operations in the fourth quarter was $151 million, exceeding the prior year quarter by $34 million despite slightly lower GAAP net income. The year-over-year improvement is primarily attributable to the negative impact on last year's reported operating cash flow of the recharacterization to investing activities of tax credits related to the Company's biomass boiler cogeneration project. Also contributing to the improvement were higher current quarter non-cash expense charges and a slightly greater favorable net change in working capital. Net capital expenditures and cash dividends were $40 million and$32 million, respectively, during the quarter, compared with $27 million and $32 million, respectively, during the same period in 2013. (Net capital expenditures is defined as capital expenditures minus proceeds from the disposal of capital assets and plant operations). Free cash flow for the fourth quarter of 2014 was $78 million, compared with $58 million for the same period last year. (Free cash flow is defined as cash flow from operations minus net capital expenditures and cash dividends).
Full-Year 2014 Results and Overview
Net sales for 2014 were $5.01 billion, up 3.4 percent, compared with $4.85 billion in 2013. The increase was mostly due to increased volumes and acquisitions, partially offset by the negative impact of foreign exchange.
Net income attributable to Sonoco for 2014 was $239.2 million, or $2.32 per diluted share, up 9.2 percent from $219.1 million, or $2.12 per diluted share, for 2013. Current year earnings were negatively impacted by after-tax charges of $22.7 million, or $.22 per diluted share, consisting of restructuring costs, asset impairment charges, acquisition expenses, and acquisition inventory step-up costs, partially offset by excess property insurance proceeds. During 2013, earnings were negatively impacted by $18.4 million, or $.18 per diluted share, for restructuring and other related charges.
Base earnings for 2014 were $261.9 million, or $2.54 per diluted share, compared with$237.5 million, or $2.30 per diluted share in 2013. The 10.3 percent increase in base earnings stemmed from manufacturing productivity improvements, a positive price/cost relationship, volume growth, proceeds from a legal settlement, acquisitions and lower pension expense. These favorable factors were partially offset by higher labor, maintenance, management incentive and other operating costs.
Current year gross profit was a record $921 million, up 5.5 percent, compared with $874 million in 2013. Gross profit as a percent of sales was 18.4 percent, compared with 18.0 percent in 2013. Selling, general and administrative (SG&A) expense was $507 million, up 4.1 percent from $487 million in the prior year primarily due to higher labor and management incentive expenses and the impact of acquisitions. SG&A expenses were 10.1 percent of sales in 2014 and 10.0% in 2013.
In 2014, cash generated from operations was $418 million, compared with $538 million in the same period in 2013. As expected, both operating cash flow and free cash flow were lower in 2014 as higher GAAP net income was more than offset by normal working capital changes and higher income tax payments and pension contributions. In addition, current year cash flow was negatively impacted by the funding of a proposed $14.7 million settlement of environmental claims and litigation associated with Fox River. Pension and post-retirement plan contributions were $66 million in 2014, compared with $42 million in 2013. Net capital expenditures and cash dividends were $169 million and $129 million, respectively, during 2014, compared with $168 million and $125 million, respectively, in 2013. Free cash flow for 2014 was $120 million, compared with $245 million for 2013. In 2014, the Company repurchased approximately 2 million shares of common stock for $82 million and expended a total $334 million, excluding assumed liabilities, for the acquisitions of Weidenhammer, a small tube and core business and an export recycling operation.
As of December 31, 2014, total debt was approximately $1.3 billion, compared with $981 million at December 31, 2013. The Company had no commercial paper outstanding at the end of either year. The Company's debt-to-capital ratio was 45.1 percent at year-end 2014, compared with 36.3 percent at the end of 2013. Cash and cash equivalents were $161 millionat year-end 2014, compared with $218 million at the end of 2013.
In reviewing Sonoco's performance in 2014, Sanders said, "We started a process of changing Sonoco for the better in 2013; targeting changes that provide us better opportunities to grow through new products, new markets, new customers, new services and new ways of thinking. These changes are creating an environment that allows us to better harness the power of our portfolio and our people to optimize business performance. Included in these changes are new processes aimed at organizing our efforts to better execute our mission. Our efforts to change for the better resulted in record sales in 2014, topping $5 billion for the first time in our 115-year history. In addition, we achieved record gross profits, as gross profits as a percent of sales gained 40 basis points to 18.4 percent; and record base earnings, which grew more than 10 percent in 2014. This is the second year in a row we have achieved or exceeded our base earnings target, which is a pattern we are committed to seeing continue."
Net interest expense for the fourth quarter of 2014 was $13.7 million, essentially flat with$13.8 million expensed during the same period in 2013. The 2014 fourth quarter effective tax rate on GAAP and base earnings was 34.3 percent and 32.2 percent, respectively, compared with 29.1 percent and 27.6 percent on GAAP and base earnings, respectively, for the prior year's quarter. The change in the effective tax rate on both GAAP and base earnings is largely the result of a fluctuation in earnings between jurisdictions with differing tax rates.
Sonoco expects first quarter 2015 base earnings to be in the range of $.56 to $.61 per diluted share. The Company's first quarter 2014 base earnings were $.52 per diluted share. Sonoco expects its 2015 base earnings per diluted share to be in the range of $2.60 and$2.70 with a target of $2.65 per diluted share, a decrease of $0.03 from what was communicated on December 5, 2014. This change is due to an increase in the expected negative effect of foreign exchange. The Company's guidance assumes a net $.26 per share improvement from the Company's base operations stemming from a combination of volume growth, a positive price/cost relationship, productivity gains and lower average diluted shares outstanding. In addition, the Company expects Weidenhammer to contribute approximately $.09 per share of incremental base earnings accretion. Offsetting these improvements is $.24 per share in projected negative items, including $.09 from higher pension expense, with the remainder due to higher depreciation and other expenses, increased taxes and the negative effect of foreign exchange. The Company's 2015 guidance assumes a 32 percent effective tax rate on base earnings.
Sonoco is projecting cash from operations in 2015 to be approximately $505 million and free cash flow to be $150 million. The projected year-over-year improvement in cash from operations is largely driven by expected higher earnings, including higher non-cash depreciation and amortization expenses, and lower pension contributions. Capital spending, net of proceeds from dispositions, is expected to increase to approximately $220 million in 2015 due primarily to planned investments in the Company's consumer-related businesses. After considering an assumed $134 million in cash dividends to shareholders, the resulting$150 million of projected free cash flow is expected to be used primarily to reduce debt.
The Company believes the assumptions reflected in the range of guidance are reasonable. However, given uncertainty regarding the future performance of the overall economy, 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 are optimistic entering 2015 that the U.S. economy will continue to steadily improve and international markets will rebound. In addition, we remain committed to our grow-and-optimize strategy. This includes achieving organic growth targets, improving operating margins, successfully integrating the Weidenhammer acquisition, maximizing cash flow, balancing capital deployment between growth and return of cash to shareholders and, finally, optimizing our global portfolio through simplification and improved efficiency."
"In 2015, we will begin implementing a series of actions focused on improving our cost competitiveness by optimizing our supply chain, enhancing productivity and streamlining our corporate and business unit structures. Utilizing a leading consultant, we have completed a detailed assessment of our processes, systems and organization and will be implementing a series of changes throughout the year directed at being better prepared and aligned to achieve our mission."
Sonoco reports its financial results in four operating segments: Consumer Packaging, Display and Packaging, Paper and Industrial Converted Products and Protective Solutions. EffectiveJanuary 1, 2014, Sonoco Alloyd, the Company's retail packaging business and previously part of the Protective Solutions segment, began reporting as part of the Display and Packaging segment. This change reflects the evolving integration occurring between these businesses, enabling them to better leverage the Company's capabilities, products and services to provide complete solutions to our retail merchandising customers. Prior period results for the affected segments have been recast to reflect this change.
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.
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.
Fourth quarter 2014 sales for the segment were $545 million, compared with $482 million in 2013. Segment operating profit was $58.6 million in the fourth quarter, compared with $48.4 million in the same quarter of 2013.
Segment sales during the quarter were up 13 percent due primarily to $52.2 million in sales from the Weidenhammer acquisition and volume growth across the segment, particularly in flexible packaging and metal closures, European composite cans, and plastic thermoformed and injection molded containers. Partially offsetting this positive growth was the negative impact of foreign currency translation.
Segment operating profit improved 21.1 percent due to manufacturing productivity, including the reimbursement of previously incurred excess costs related to a flexible packaging material issue, volume gains, modest accretion from the Weidenhammer acquisition and lower pension expense. These positive factors were partially offset by higher labor, maintenance and other operating costs.
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; retail packaging, including printed backer cards, thermoformed blisters and heat sealing equipment; and paper amenities, such as coasters and glass covers.
Fourth quarter 2014 sales for this segment were $170 million, compared with $155 million in 2013. Segment operating profit was $5.2 million in the quarter, compared with $3.5 million in 2013.
Sales for the quarter were up 10 percent year over year on volume growth in U.S. display and packaging fulfillment activity and international packaging services. Quarterly operating profit for the segment increased 49.3 percent due to volume growth and manufacturing productivity gains, which were only partially offset by higher labor and operating costs.
Paper and Industrial Converted Products
The Paper and Industrial Converted Products segment includes the following products: 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 material recycling services.
Fourth quarter 2014 sales for the segment were $476 million, compared with $464 million in 2013. Segment operating profit was a record $37.0 million in the fourth quarter of 2014, compared with $33.4 million in 2013.
Segment sales for the quarter were up 2.7 percent as volume growth and sales added from businesses acquired during the past twelve months were partially offset by the negative impact of foreign currency translation. Volume in the segment improved due to higher North America and European paper, tubes, cores and reels sales, offset by lower volume in Asiaand South America.
Operating profit gained 10.8 percent year over year as volume growth, a positive price/cost relationship, modest productivity improvements and lower pension expense were only partially offset by a higher labor, maintenance and other operating costs.
The Protective Solutions segment includes the following products: custom-engineered, paperboard-based and expanded foam protective packaging and components; and temperature-assured packaging.
Fourth quarter 2014 sales were $127 million, compared with $114 million in the same period in 2013. Operating profit was $8.8 million, compared with $8.0 million in the same quarter of 2013.
Sales grew 10.8 percent during the fourth quarter due to higher volume in temperature-assured products, consumer protective packaging and automotive components. Operating profit rose 10.6 percent as volume gains and manufacturing productivity improvements were only partially offset by higher maintenance, labor and other operating costs