Sonoco Reports Q3 2017 Results: Record Sales Drive 11 Percent Increase in Net Income
Thursday, October 19, 2017
Press release from the issuing company
HARTSVILLE, S.C. - Sonoco (NYSE:SON), one of the largest diversified global packaging companies, today reported financial results for its third quarter, ending October 1, 2017.
Third Quarter Highlights
Fourth Quarter and Full-Year Guidance Update
Note: Fourth-quarter and full-year 2017 GAAP guidance are not provided in this release due to the likely occurrence of one or more of the following, the timing and magnitude of which we are unable to reliably forecast: possible gains or losses on the sale of businesses or other assets, restructuring costs and restructuring-related impairment charges, acquisition-related costs, and the income tax effects of these items and/or other income tax-related events. These items could have a significant impact on the Company's future GAAP financial results.
“In looking at the performance of our business segments, we were extremely pleased with the record sales and operating profit generated by our Consumer Packaging segment, particularly in a challenging consumer packaged food market. In addition, our Paper and Industrial Converted Products business registered a 27 percent improvement in operating profit, while producing its best third-quarter results in three years. Results in our Protective Solutions and Display and Packaging segments lagged last year’s quarter, but each registered sequential quarterly improvement as we continue to adjust these businesses to changing market conditions.”
Third Quarter Review
GAAP net income attributable to Sonoco in the third quarter was $72.8 million, or $0.72 per diluted share, an increase of $7.4 million, compared with $65.4 million, or $0.64 per diluted share, in 2016. Base earnings in the third quarter were $76.6 million, or $0.76 per diluted share, an increase of $3.1 million compared with $73.5 million, or $0.72 per diluted share, in 2016. Base earnings and base earnings per diluted share are non-GAAP financial measures adjusted to remove restructuring-related items, asset impairment charges, acquisition expenses and other items, if any, the exclusion of which the Company believes improves comparability and analysis of the ongoing operating performance of the business. (See base earnings definition, explanation and reconciliation to GAAP earnings later in this release.)
Third-quarter GAAP earnings include charges totaling $3.8 million, or $0.04 per diluted share. These charges consist mostly of acquisition and acquisition-related charges as well as non-base tax charges related to tax rate changes and reserve adjustments. In the third quarter of 2016, GAAP results included $8.1 million, or $0.08 per diluted share, after tax, consisting of restructuring charges and a goodwill impairment charge for the Company's industrial converting operations in Brazil.
Gross profits were a record $250.9 million in the third quarter, an increase of $15.5 million or 6.6 percent, compared with $235.4 million in the same period in 2016. Gross profit as a percentage of sales declined to 18.9 percent, compared with 19.5 percent in the same period in 2016. The gross profit percentage reduction was primarily due to higher raw material and other operating costs offset by manufacturing and procurement productivity. Third-quarter selling, general and administrative expenses increased $8.7 million from the prior year to $130.3 million. This increase was driven by wage inflation and acquisition-related expenses.
Third-quarter 2017 sales for the segment were a record $566 million, compared with $520 million in 2016. Segment operating profit was a record $67.9 million in the third quarter, compared with $63.8 million in the same quarter of 2016.
Segment sales increased 8.9 percent compared to the prior-year quarter due to acquisitions, net of divestitures, higher selling prices and the positive impact of foreign exchange which more than offset modestly lower volume/mix. Segment operating profit grew 6.4 percent compared to the prior-year quarter due to strong improvement in manufacturing productivity and a positive price/cost relationship. These positive factors were partially offset by lower volume in metal ends and composite cans in North America and flexible packaging. Segment operating margin declined slightly by 30 basis points to 12.0 percent.
Display and Packaging
Third-quarter 2017 sales for this segment were $136 million, compared with $132 million in 2016. Segment operating profit was $2.0 million in the quarter, compared with $5.2 million in the prior-year quarter.
Sales increased 2.7 percent compared to last year’s quarter due to the positive impact of foreign exchange. Operating profit in the segment declined by $3.2 million due to higher operating costs associated with the ramp up of production at a new domestic pack center.
Paper and Industrial Converted Products
Third-quarter 2017 sales for the segment were $483 million, up from $425 million in 2016. Segment operating profit was $42.2 million in the second quarter, compared with $33.2 millionin 2016.
Segment sales grew approximately 13.8 percent during the quarter due to higher selling prices implemented to recover higher raw material costs, the positive impact of foreign exchange, and an improved volume/mix of business. Segment operating profit improved 26.8 percent compared to the prior year quarter due to a positive price/cost relationship, including an improvement in the Company's corrugating medium operations, improved volume in international tubes and cores and global paper operations, and gains from manufacturing productivity. Operating margin in the segment improved 90 basis points to 8.7 percent.
Third-quarter 2017 sales were $140 million, compared with $132 million in 2016. Operating profit was $11.3 million, compared with $12.6 million in the third quarter of 2016.
This segment’s 5.7 percent increase in third-quarter sales came from acquisitions, higher selling prices, and the positive impact of foreign exchange offset by negative volume. Operating profit declined 10.4 percent in the quarter due primarily to lower volume in automotive components and the related unfavorable impact on manufacturing productivity. Segment operating margin was 8.1 percent for the quarter, down from 9.5 percent in the prior year.
GAAP net income attributable to Sonoco for the first nine months of 2017 was $169.7 million or $1.68 per diluted share, compared with $181.6 million or $1.78 per diluted share in 2016. Earnings in the first nine months of 2017 included $38.6 million, or $0.39 per diluted share, related to after-tax charges for pension settlement distributions to certain pension plan participants, restructuring charges and acquisition costs. These charges were partially offset by non-base insurance settlement gains. Earnings in the first nine months of 2016 included $33.1 million, or $0.33 per diluted share, in after-tax asset impairment and restructuring charges related to the sales of the Company's paper mill in France and retail packaging business in Puerto Rico, along with other previously announced restructuring actions and a goodwill impairment of the Company’s industrial converted products business in Brazil.
Base earnings in the first nine months of 2017 were $208.3 million, or $2.07 per diluted share, compared with $214.7 million, or $2.11 per diluted share in the same period in 2016, a 3 percent decline. In addition, current year-to-date gross profit was $707.0 million, compared with $722.6 million in the first nine months of 2016. These declines stemmed from lower volume/mix and divestitures, net of acquisitions, partially offset by productivity gains. (See base earnings definition, explanation and reconciliation to GAAP earnings later in this release.) Gross profit as a percentage of sales in the first nine months of 2017 was 18.9 percent, compared with 19.8 percent in 2016.
For the first nine months of 2017, cash generated from operations was $282.1 million compared with $348.7 million in 2016, a decline of $66.6 million. Working capital consumed $16.2 millionless cash for the first nine months of 2017 than in the same period in 2016 due to higher payments in 2016 of items outstanding at December 31, 2015. This year-over-year benefit was more than offset by increased cash paid for taxes and benefit plan contributions. Additionally, miscellaneous changes in prepaid, accrued expenses, and other assets and liabilities consumed more cash in 2017 compared to 2016. Net capital expenditures and cash dividends were $141.0 million and $114.4 million, respectively, during the first nine months of 2017, compared with $143.9 million and $109.8 million, respectively, in 2016.
Free cash flow for the first nine months of 2017 was $26.7 million, compared with $94.9 millionin the same period last year. Free cash flow is a non-GAAP financial measure which may not represent the amount of cash flow available for general discretionary use because it excludes non-discretionary expenditures, such as mandatory debt repayments and required settlements of recorded and/or contingent liabilities not reflected in cash flow from operations. (See free cash flow reconciliation later in this release. 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, and/or plus costs incurred in, the disposition of capital assets.)
At October 1, 2017, total debt was approximately $1.43 billion, compared with $1.05 billion as of December 31, 2016. At the end of the third quarter, the Company had a total-debt-to-total-capital ratio of 44.8 percent, compared with 40.4 percent at December 31, 2016. Cash and cash equivalents were $247.9 million as of October 1, 2017, compared with $257.2 million at December 31, 2016. The increase in the debt and debt ratio are primarily due to the $230 millionacquisition of Peninsula Packaging, Inc., a thermoforming business, in March 2017 and the $170 million acquisition of Clear Lam Packaging, Inc., a flexible packaging business, in July 2017.
Fourth Quarter and Full-Year 2017 Outlook
Full-year 2017 base earnings is expected to be in a range of $2.75 to $2.81, which is an increase from the previous estimate of $2.73 to $2.80. The Company’s 2017 base earnings guidance anticipates a 31.7 percent effective tax rate for the year.
Operating cash flow in 2017 is expected to be approximately $415 million, and free cash flow is expected to be approximately $70 million, following a $50 million pre-tax contribution to the Company’s defined benefit pension plan in the fourth quarter of 2017. Previously, the Company had estimated free cash flow would be approximately $100 million, which did not include the expected fourth-quarter benefit plan contribution.
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 expect higher resin prices during the quarter, which should provide a headwind to our polymer-based packaging businesses. As a result, we are implementing price increases and expect our contractual cost recovery mechanisms to ultimately offset current cost increases. On the other hand, recovered paper prices have fallen entering the fourth quarter, which should help our paper-based businesses recover previous raw material inflation. We were fortunate to weather the hurricanes and other natural disasters with minimal impact to our operations. The storms’ impact could provide both headwinds and opportunity in the fourth quarter. The storms could impact consumers buying habits and we are cautiously optimistic regarding demand for our diverse mix of packaging products through the rest of the year.
“We remain aligned on implementing our Grow and Optimize strategy. We’re pursuing growth through targeted acquisitions and by developing new products, particularly those focused on serving consumer demand for more fresh and healthy foods in the faster-growing perimeter of the store. We also see opportunities to consolidate industrial-related markets and further optimize our portfolio. Finally, to further drive margin expansion we are working to improve our operating structure by ensuring our businesses are serving the right customers with the right cost structure.”
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