Sonoco Reports Third Quarter 2015 Results
Thursday, October 22, 2015
Press release from the issuing company
HARTSVILLE, S.C. - Sonoco, one of the largest diversified global packaging companies, today reported consolidated financial results for its third quarter, ending September 27, 2015.
(2014 consolidated financial results referenced in this news release have been restated to reflect adjustments associated with the previously reported misstatements of the Company’s Irapuato, Mexico, packaging center. Information on the restatement is available in the Company’s 2014 Annual Report on Form 10-K/A.)
Third Quarter Highlights
Earnings Guidance Update
Third Quarter Comments
“We are encouraged by the continued solid momentum achieved by our Consumer Packaging and Protective Solutions segments during the quarter,” said Sonoco President and Chief Executive Officer Jack Sanders. “However, weak performance in our Industrial-focused businesses kept overall results at the low end of our expectations. Overall, gains from acquisitions, manufacturing productivity improvements and a positive price/cost relationship were more than offset by soft volume, a negative mix in some of our businesses and higher labor, pension, maintenance and other operating costs along with the negative impact of continued strength of the U.S. dollar.
“Our Paper and Industrial Converted Products segment experienced a significant decline in operating profits during the quarter driven by weak volume in North America and emerging markets, a negative mix of business and higher labor, pension, maintenance and other operating costs, which were partially offset by modest improvement in manufacturing productivity.
“In our Protective Solutions segment, operating profits grew 26 percent due to continued strong volume growth, a positive price/cost relationship and manufacturing productivity improvements, which more than offset negative mix and higher labor, maintenance and other operating costs.”
Third Quarter Summary
GAAP net income attributable to Sonoco in the third quarter was $43.9 million, or $.43 per diluted share, compared with $67.1 million, or $.65 per diluted share, in the prior-year. Base earnings in the third quarter were $66.7 million, or $.65 per diluted share, compared with $70.8 million, or $.69 per diluted share, in 2014. Both GAAP and base prior-year earnings benefited from the settlement of a lawsuit which added approximately $.03 per diluted share, after tax, in the quarter. 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 exclude $12.1 million, or $.12 per diluted share, in after-tax asset impairment charges related to exchange rates in Venezuela; $5.9 million in after-tax charges, or $.06 per diluted share, related to previously announced restructurings and asset impairment and acquisition costs; and $4.8 million in after tax charges, or $.05 per diluted share, in legal and financial professional fees incurred to investigate and correct the financial misstatements at the Irapuato packaging center. Base earnings in the third quarter of 2014 excluded after-tax charges of $3.7 million, or $.04 per diluted share, stemming from asset impairments, restructuring costs and acquisition expenses. 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 $1.24 billion, down approximately 2 percent, compared with $1.26 billion in last year’s quarter. Sales were negatively impacted $82 million by foreign exchange along with lower selling prices stemming from the year-over-year decline in recovered paper and resin costs. These negative factors essentially offset net acquisition sales gains of $64 million and modest volume growth.
Gross profit was $229 million in the third quarter, up about 3 percent, compared with $222 million in the same period in 2014. Gross profit as a percent of sales improved to 18.5 percent, compared with 17.6 percent in the same period in 2014. The Company’s third quarter selling, general and administrative (SG&A) expenses on a GAAP basis were $130 million, or 10.5 percent of sales, compared with $111 million, or 8.8 percent of sales. The increase was largely attributable to legal and professional costs associated with the investigation of the Irapuatopackaging center misstatement, higher labor expenses and costs associated with newly acquired businesses, while SG&A was reduced in 2014 by legal settlement proceeds.
Cash generated from operations in the third quarter was $145 million, compared with $162 million in the same period in 2014. Operating cash flow was lower this quarter primarily due to lower GAAP net income, higher cash taxes and changes in working capital. Net capital expenditures and cash dividends were $54 million and $35 million, respectively, during the quarter, compared with $47 million and $32 million, respectively, during the same period in 2014. (Net capital expenditures is defined as capital expenditures minus proceeds from the disposal of capital assets). Free cash flow for the third quarter of 2015 was $56 million, compared with $83 million for the same period last year. (Free cash flow is defined as cash flow from operations minus net capital expenditures and cash dividends).
For the first nine months of 2015, net sales were $3.7 billion, essentially flat with 2014. The negative impact of foreign exchange reduced sales by approximately $205 million during the period, essentially offsetting approximately $199 million in sales coming from net acquisitions. Lower selling prices also essentially offset volume growth during the period.
Net income attributable to Sonoco for the first nine months of 2015 was $194.1 million, or $1.90per diluted share, up 10 percent, from $176.9 million, or $1.71 per diluted share, in the same period in 2014. Earnings in the first nine months of 2015 benefited from a net gain of $2.9 million, after tax, or $.03 per diluted share, from a combination of the following: a favorable disposition of Fox River-related claims/litigation, gain on the sale of two metal end plants and a favorable tax reserve adjustment, partially offset by foreign exchange driven asset impairments in Venezuela, charges for restructuring costs, asset impairment charges, acquisition-related and environmental remediation expenses, and professional fees to investigate and correct the financial misstatements at the Irapuato packaging center. During the same period in 2014, earnings were negatively impacted by $9.2 million, or $.09 per diluted share, of restructuring and other related charges.
Base earnings for the first nine months were $191.2 million, or $1.87 per diluted share, compared with $186.1 million, or $1.80 per diluted share for the same period in 2014. This 3-percent increase in base earnings stemmed from a positive price/cost relationship, manufacturing productivity improvements and acquisitions. Partially offsetting these positive factors were higher labor, pension, maintenance and other operating costs and unfavorable changes in the mix of products sold.
Current year-to-date gross profit was $690 million, up 4 percent, compared with $661 million in the same period of 2014, largely due to the prior-year acquisition of Weidenhammer, a European composite can business. Gross profit as a percent of sales was 18.7 percent, compared with 17.9 percent for the same period in 2014.
For the first nine months of 2015, cash generated from operations was $318 million, compared with $267 million in the same period in 2014. Both operating cash flow and free cash flow were higher in the first nine months of 2015 as higher GAAP net income was also benefited by a less negative impact of net working capital changes year over year. Year-to-date 2015 pension and post-retirement plan contributions, net of expenses, were $42 million less than the previous year. Net capital expenditures and cash dividends were $110 million and $103 million, respectively, during the first nine months of 2015, compared with $129 million and $96 million, respectively, in 2014. Free cash flow for the first nine months of 2015 was $106 million, compared with $42 million for the same period last year. Year-to-date, the Company has used available cash to reduce debt, net of proceeds, by approximately $48 million. In addition, the Company purchased a majority interest in a flexible packaging business in Brazil for $16 million.
At September 27, 2015, total debt was approximately $1.20 billion, compared with $1.25 billionat December 31, 2014, including no outstanding commercial paper. The Company’s debt-to-capital ratio was 45 percent at the end of the third quarter, compared with 46 percent at the end of 2014. Cash and cash equivalents were $193 million at September 27, 2015, compared with $161 million at year end 2014.
During the third quarter, the Company concluded that it was more appropriate to report its Venezuelan operations based on the SIMADI alternative exchange rate mechanism currently in place in Venezuela rather than continue using the official rate. As a result, third quarter Venezuela operating results and all monetary assets and liabilities in Venezuela are reflected in the consolidated financial statements using SIMADI-based rates; the SIMADI rate at the end of September was 198 bolivars to the dollar compared to the official rate of 6.3 to 1. This change resulted in a foreign exchange remeasurement loss on net monetary assets. In addition, the use of the significantly higher SIMADI exchange rate resulted in impairment charges against inventories and certain long-term nonmonetary assets since the U.S. dollar value of projected future cash flows from these assets was no longer sufficient to recover their U.S. dollar carrying values. The combined impact on current quarter results of the impairment charges and remeasurement loss was $12.1 million on both a before and after-tax basis.
Net interest expense for the third quarter of 2015 increased to $13.7 million, compared with $12.9 million during the same period in 2014. The increase was due to higher year-over-year debt levels as result of the Weidenhammer acquisition. The 2015 third quarter effective tax rate on GAAP and base earnings was 37.7 percent and 30.8 percent, respectively, compared with 29.6 percent and 29.9 percent on GAAP and base earnings, respectively, for the prior year’s third quarter. A less favorable distribution of earnings between high and low-tax jurisdictions, as well as certain non-recurring tax charges occurring in the current quarter, contributed to the higher year-over-year third quarter effective tax rate on both GAAP and base earnings.
Fourth Quarter and Full-Year 2015 Outlook
Sonoco expects fourth quarter 2015 base earnings to be in the range of $.59 to $.64 per diluted share. The Company’s fourth quarter 2014 base earnings were $.61 per diluted share. Annual 2015 base earnings guidance has been updated to $2.46 to $2.51. Previous base earnings guidance was $2.48 to $2.58 per share. The Company’s 2015 guidance reflects an expectation of a 31.5 percent effective tax rate. Free cash flow is expected to be approximately $140 millionin 2015, compared with $120 million in 2014. The year-over-year increase reflects expectations for lower pension and post retirement plan contributions along with an increase in use of cash for both working capital and dividends.
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, Sonoco CEO Sanders said, “We are continuing to execute our ‘Grow and Optimize’ strategy, which is focused on growing our Consumer Packaging and Protective Solutions businesses and optimizing our industrial-related businesses. As part of this strategy, we are working closely with our customers to develop several new innovative growth projects in the U.S., Europe and Asia that are expected to add to sales in 2016 and beyond. Near-term we expect to continue facing global market uncertainty, which may impact demand for our products, while a strong U.S. dollar could continue to hinder operating results. As a result, we are narrowing our guidance and are working diligently to offset these headwinds by optimizing our supply chain, driving productivity improvements and further streamlining our cost structure.”
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.
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 2015 sales for the segment were $522 million, compared with $480 million in 2014. Segment operating profit was $55.2 million in the third quarter, compared with $49.8 million in the same quarter of 2014.
Segment sales during the quarter were up 8.7 percent due primarily to sales added from the prior year acquisition of Weidenhammer and the recent purchase of a majority interest in a Brazilian flexible packaging business, partially offset by the sale of two metal ends plants. Sales also benefited from volume gains in flexible packaging, international composite cans, and thermoformed and injection molded plastics, which more than offset declines in North Americacomposite cans and blow molded plastics. Offsetting these sales gains were lower selling prices and the negative impact of foreign exchange. Segment operating profit improved 11 percent in the quarter as gains from acquisitions, a positive price/cost relationship and manufacturing productivity improvements more than offset higher labor, pension, maintenance and other operating costs along with the negative impact of a stronger dollar on foreign currency translation.
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.
Third quarter 2015 sales for this segment were $163 million, compared with $177 million in 2014. Segment operating profit was $5.4 million in the quarter, compared with $2.0 million in 2014.
Sales for the quarter declined 8.1 percent as volume growth in international display and packaging activity was more than offset by the negative impact of foreign exchange. Quarterly operating profit for the segment improved significantly year over year due primarily to productivity improvements and volume gains, partially offset by higher labor and other costs, and the negative impact of foreign currency translation.
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.
Third quarter 2015 sales for the segment were $428 million down from $481 million in 2014. Segment operating profit was $32.3 million compared to $49.0 million in 2014.
Segment sales declined 11 percent due to the negative impact of foreign exchange and lower volume in recycling, tubes and cores and reels, partially offset by higher paper and corrugating volume. Sales were also negatively impacted by lower selling prices related to lower recovered paper prices. Operating profit declined 34 percent due to lower global volume, negative mix of business, general cost inflation, increased pension expense and the negative impact of foreign currency translation, which were partially offset by manufacturing productivity improvements.
The Protective Solutions segment includes the following products: custom-engineered, paperboard-based and expanded foam protective packaging and components; and temperature-assured packaging.
Third quarter 2015 sales were $130 million, up 4.5 percent compared with $125 million in the same period in 2014. Operating profit was $12.9 million, compared with $10.3 million in the same quarter of 2014.
The 4 percent increase in third-quarter sales was due to higher volume in molded automotive components, temperature-assured packaging and paper-based appliance packaging, partially offset by the negative impact of foreign exchange. Operating profit increased 25.6 percent due to volume gains along with price/cost and manufacturing productivity improvements, partially offset by a negative mix of business and higher labor and other operating costs.
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