HARTSVILLE, S.C. - Sonoco, one of the largest diversified global packaging companies, today reported financial results for its second quarter that ended June 30, 2013.
Second Quarter Highlights
- Second quarter 2013 GAAP earnings per diluted share were $.53, compared with $.50 in 2012.
- Second quarter 2013 GAAP results include $.06 per diluted share in after-tax charges related to restructuring activities, including previously announced plant closures. Second quarter 2012 GAAP results included an $.08 per diluted share charge related to restructuring activities.
- Base net income attributable to Sonoco (base earnings) for second quarter 2013 was $.59 per diluted share, compared with $.58 in 2012. (See base earnings definition and reconciliation later in this release.) Sonoco previously provided second quarter base earnings guidance of $.56 to $.60 per diluted share.
- Second quarter 2013 net sales were $1.23 billion, up 2 percent, compared with $1.20 billion in 2012.
- Cash flow from operations was $108.2 million, compared with $42.9 million in 2012. Free cash flow for the second quarter was $34.9 million, compared with a negative $42.1 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
- Third quarter 2013 base earnings are expected to be $.59 to $.63 per diluted share.
- Guidance for full-year 2013 base earnings remains $2.26 to $2.32 per diluted share.
Second Quarter Review
Commenting on the Company's second quarter results, Sonoco President and Chief Executive Officer Jack Sanders said, "Overall, we're pleased with our results for the quarter. We were able to achieve records in sales and gross profits, while delivering base earnings near the high end of our guidance. Despite challenging global economic conditions, base earnings benefited from volume gains, productivity improvements and a positive price/cost relationship. These positive factors were partially offset by higher labor, pension and other operating costs and a higher effective tax rate on base earnings."
"Operating profits in our Consumer Packaging segment improved 11 percent in the quarter due to a positive price/cost relationship and productivity improvements, partially offset by higher labor, pension and other costs. Operating profits from ourDisplay and Packaging segment improved as positive volume more than offset higher operating costs."
"Second quarter operating profits declined 9 percent in our Paper and Industrial Converted Products segment despite the positive impact of productivity improvements and a slightly positive price/cost relationship. However, these favorable factors were more than offset by higher maintenance, labor, pension and other costs, including a $1.9 million pension settlement charge related to plan changes in Canada."
"Our Protective Solutions segment reported an improvement in operating profits of nearly 4 percent for the quarter due to increased volume, productivity improvements and a positive price/cost relationship. However, these positive factors were partially offset by higher labor and other operating expenses."
GAAP net income attributable to Sonoco in the second quarter was $55.0 million, or $.53 per diluted share, compared with$51.3 million, or $.50 per diluted share, in 2012. Base earnings were $60.8 million, or $.59 per diluted share, in the second quarter, compared with $59.7 million, or $.58 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.
Second quarter base earnings excluded after-tax charges of $5.8 million, or $.06 per diluted share, stemming from asset impairment and restructuring costs associated with the anticipated closure of the Company's thermoforming plant in Ireland and other previously announced restructuring activities. Items excluded from base earnings in the 2012 second quarter totaled $8.3 million, after tax, or $.08 per diluted share, for restructuring expenses and impairment charges associated with plant closures and manufacturing rationalization efforts in Germany, Canada and the United States. 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 $1.23 billion, compared with $1.20 billion in the same period in 2012. This 2 percent improvement was almost exclusively driven by increased volume in Display and Packaging and Protective Solutions.
Gross profits were a record $223 million in the second quarter of 2013, compared with $217 million in the same period in 2012. Gross profit as a percent of sales improved to 18.1 percent, compared with 18.0 percent in the same period in 2012. The modest improvement in total gross profits was due to improved volume and productivity improvements, which more than offset higher maintenance, labor, pension and other costs. The Company's second quarter selling, general and administrative expenses increased 3 percent to $122 million, but were essentially flat as a percentage of sales due to higher revenue.
Cash generated from operations in the second quarter was $108.2 million, up 152 percent, compared with $42.9 million in the same period in 2012. Operating cash flow increased during the quarter reflecting higher non-cash charges, lower income tax payments and a beneficial change in net working capital. Net capital expenditures and cash dividends were $41.9 million and$31.4 million, respectively, compared with $54.9 million and $30.2 million, respectively, during the same period in 2012.
For the first six months of 2013, net sales were essentially flat at $2.41 billion, compared with $2.41 billion in the first half of 2012. Net income attributable to Sonoco for the first six months of 2013 was $103.1 million, or $1.00 per diluted share, compared with $94.4 million, or $0.92 per diluted share, in the first half of 2012.
Earnings in the first half of 2013 were negatively impacted by after-tax restructuring and other charges of $9.4 million, or $.09per diluted share, compared with $19.1 million, or $0.19 per dilute share, in the same period in 2012.
Base earnings for the first half of 2013 were $112.6 million, or $1.09 per diluted share, compared with $113.5 million, or $1.11per diluted share, in the first half of 2012. The 1 percent reduction in base earnings stemmed from higher labor, maintenance, pension and other expenses, lower volume and unfavorable mix. These negative factors were partially offset by productivity improvements and a positive price/cost relationship.
Gross profit was $428 million in the first half of 2013, compared with $433 million in the same period in 2012. Gross profit as a percent of sales was 17.8 percent, compared with 17.9 percent for the same period in 2012.
For the first six months of 2013, cash generated from operations was $244.5 million, compared with $140.4 million in the same period in 2012. The improvement in cash flow from operations was due largely to working capital changes and lower pension and postretirement benefit plan contributions which were $24.8 million in the 2013 period, compared with $59.0 million in 2012. Net capital expenditures and cash dividends were $97.2 million and $61.7 million, respectively, during the first half of 2013, compared with $98.0 million and $59.3 million, respectively, in 2012. Free cash flow was $85.6 million for the period, compared with a negative $17 million last year.
At June 30, 2013, total debt was approximately $1.09 billion, a $282 million reduction from the Company's year-end total of$1.37 billion. In the first half of 2013, the Company repatriated $260 million of accumulated offshore cash, of which $135 millionwas used to pay off a term loan issued in November 2011. 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 June 30, 2013, compared with$152 million at December 31, 2012. The Company's debt-to-total capital ratio was 41.6 percent at June 30, 2013, compared with 47.7 percent at the end of 2012 and cash and cash equivalents were $179.4 million, compared with $373.1 million at year-end 2012.
Net interest expense for the second quarter of 2013 decreased to $14.4 million, compared with $15.2 million during the same period in 2012. The decrease was due to lower year-over-year debt levels. The second quarter 2013 effective tax rate on both GAAP and base earnings was 34.0 percent, compared with 35.3 percent and 32.8 percent, respectively, for the same period in 2012. The year-over-year variances in the second quarter effective tax rates reflect a greater proportion of current-year income earned in higher tax jurisdictions and a more favorable mix in the tax rates applicable to this year's restructuring expenses.
Third Quarter and Full-Year 2013 Outlook
Sonoco expects third quarter 2013 base earnings to be in the range of $.59 to $.63 per diluted share. The Company's third quarter 2012 base earnings were $.55 per diluted share. Annual base earnings per diluted share are expected to be in the range of $2.26 to $2.32, which is unchanged from previous estimates. Free cash flow is expected to be approximately $150 million for 2013, which remains unchanged from previous estimates. The Company's base earnings guidance assumes modest volume growth and productivity improvements, offset by a negative price/cost relationship 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, "While we face negative price/cost headwinds entering the third quarter, we remain optimistic that we'll see a steadily improving operating environment in the second half of 2013. We have three areas of focus: offsetting higher raw material inflation by implementing necessary price increases in our Paper and Industrial Converted and Consumer Packaging segments; bringing recently won business on line as efficiently and profitably as possible; and, optimizing our portfolio of businesses by addressing underperforming operations, boosting efforts to improve productivity and managing costs to improve margins and free cash flow."