Business News

Sonoco Reports Strong Third Quarter 2010 Results; Quarterly Base Earnings Reach Record

Thursday 21. October 2010 - Sonoco (NYSE: SON), one of the largest diversified global consumer and industrial packaging companies, today reported strong third quarter 2010 results with sales and earnings significantly exceeding prior year results.

Highlights
Third quarter 2010 GAAP earnings per diluted share were $.57, compared with $.47 in 2009.
Third quarter 2010 GAAP results include noncash impairment and restructuring charges of $.07 per diluted share primarily associated with an asset impairment charge in the Flexible Packaging unit and $.01 per diluted share of acquisition related costs.
Base net income attributable to Sonoco (base earnings) for third quarter 2010 was a record $.65 per diluted share, up 30 percent, compared with $.50 in 2009. (See base earnings definition and reconciliation later in this release.)
Third quarter 2010 net sales of $1.05 billion were 13 percent higher than the $931 million in 2009.
Guidance for full-year 2010 base earnings is moved to $2.32 to $2.36 per diluted share, from the previously forecast $2.27 to $2.34.
Commenting on the Company’s third quarter results, Chairman, President and Chief Executive Officer Harris E. DeLoach Jr. said, “Our focus on growth and improving operating performance continued to pay off as base earnings for the quarter reached a record on strong volume, lower pension costs and improved productivity along with a neutral price/cost. In addition, base earnings per diluted share for the quarter met the high end of our previous guidance and equaled First Call’s consensus of $.65 per diluted share.
“Much of the quarter’s year-over-year improvement came from our industrial-focused businesses which continued to rebound strongly from last year’s recession-impacted results. Operating profits in our Tube and Core/Paper segment experienced a 76 percent improvement, and our industrial-related businesses within All Other Sonoco reported over a 100 percent year-over-year improvement. The majority of our industrial businesses experienced strong volume and benefited from solid productivity improvements.
“On the consumer side, our Consumer Packaging segment recorded year-over-year gains in operating profits for the eleventh consecutive quarter, due primarily to productivity improvements and acquisition gains. However, results declined in our Packaging Services segment due to weak volume stemming from previously reported business losses in point-of-purchase displays and fulfillment, which were only partially offset by productivity improvements.”
Third Quarter and Nine Months Results
Third quarter net income attributable to Sonoco was $59.0 million, or $.57 per diluted share, compared with $47.7 million, or $.47 per diluted share, in 2009. Base earnings were $67.0 million, or $.65 per diluted share, in the quarter, compared with $50.9 million, or $.50 per diluted share, in 2009. Base earnings and base earnings per diluted share are non-GAAP financial measures adjusted to remove restructuring charges, asset impairment charges, acquisition costs and other items, if any; the exclusion of which the Company believes improves comparability and analysis of the underlying financial performance of the business.
Excluded from base earnings in the third quarter of 2010 were the previously mentioned after-tax impairment and restructuring charges of $6.9 million, or $.07 per diluted share, primarily related to noncash asset impairment charges in the Company’s Flexible Packaging unit. The impairment charges were taken after the Company was advised by one of its customers that its current contract to provide certain packaging will not be renewed in its entirety. According to the customer, the business reduction will be phased out over the next two years. The expected loss of business will not impact current year sales. Acquisition-related costs of $1.1 million, after tax, ($.01 per diluted share) were also excluded from 2010 third quarter base earnings. After-tax restructuring charges of $3.2 million, or $.03 per diluted share, were excluded from base earnings in the 2009 quarter. Additional information about base earnings and base earnings per share along with reconciliations to the most closely applicable GAAP financial measures is provided later in this release.
The Company’s overall gross profit margin in the third quarter improved to 19.0 percent of sales, from 18.6 percent in the same period in 2009, due to productivity gains, higher volumes, lower pension expenses and cost-control initiatives.
Net sales for the third quarter were $1.05 billion, compared with $931 million in the same period in 2009. This 13 percent increase during the quarter was due to improved Companywide volumes, higher selling prices, open-market sales of corrugating medium previously produced under a cost-plus-fixed-management-fee arrangement and acquisitions. These factors were partially offset by a $6 million negative impact from foreign currency translation, primarily as a result of the weaker euro. The impact of higher selling prices was realized almost exclusively in the Tubes and Cores/Paper segment, where the gains were principally driven by higher recovered paper prices.
Cash generated from operations in the third quarter was $145 million, compared with $176 million in the same period in 2009. Higher earnings were offset by an increased use of cash to fund working capital resulting from significantly higher levels of business activity, compared with the prior year quarter. Capital expenditures and cash dividends paid to shareholders were $42 million and $28 million, respectively, during the third quarter of 2010, compared with $25 million and $27 million, respectively, in the same period in 2009. On June 29, 2010, Sonoco paid approximately $120 million in cash to acquire Associated Packaging Technologies, Inc. (APT), a leading provider of rigid plastic food packaging serving the frozen food industry in North America, Europe and Australia/New Zealand.
For the nine-month period ending September 26, 2010, net sales increased 15 percent to $3.0 billion, compared with $2.6 billion in 2009. Net income attributable to Sonoco for the 2010 nine-month period was $166.5 million ($1.63 per diluted share), compared with $104.4 million ($1.03 per diluted share) in the same period in 2009. Earnings for the 2010 nine-month period were negatively impacted by previously mentioned after-tax impairment, restructuring and acquisition charges of $12.1 million ($.12 per diluted share), compared with $16.6 million ($.17 per diluted share) in the 2009 period.
Base earnings for first nine months of 2010 were $178.6 million ($1.75 per diluted share), compared with $121.0 million ($1.20 per diluted share) during the same period in 2009. Significantly higher Companywide volumes, lower pension costs and productivity improvements drove the 48 percent, year-over-year gain in base earnings. Gross profit as a percent of sales was 18.9 percent, compared with 18.2 percent in the first nine months of 2009.
For the 2010 nine-month period, cash generated from operations was $261 million, compared with $358 million in the same period in 2009. Higher earnings were offset by an increased use of cash flow to fund working capital resulting from significantly higher levels of business activity, compared to the prior year. Capital expenditures and cash dividends were $101 million and $83 million, respectively, compared with $83 million and $81 million, respectively, in the same period in 2009. In addition, the Company used cash to fund acquisitions totaling $134 million and $1 million in the first nine months of 2010 and 2009, respectively. At the end of the third quarter of 2010, total debt was $626 million, compared with $581 million as of the end of December 31, 2009. The Company’s debt-to-total-capital ratio as of September 26, 2010 was 29.4 percent, basically flat with the 29.6 percent at the end of 2009. The Company had $43 million outstanding under its $500 million commercial paper program as of September 26, 2010. Cash and cash equivalents totaled $169 million, compared with $185 million at the end of 2009.
Fourth Quarter 2010 Outlook
Sonoco expects fourth quarter 2010 base earnings to be in the range of $.57 to $.61 per diluted share. Base earnings in the fourth quarter of 2009 were $.58 per diluted share. For the full-year 2010, base earnings are currently projected to be in the range of $2.32 to $2.36 per diluted share, compared with the guidance given on July 21, 2010, of $2.27 to $2.34 per diluted share. The change is due primarily to achieving the upper end of the range of guidance in the third quarter. The Company’s 2010 earnings guidance reflects an expected effective tax rate of approximately 30 percent.
The Company’s base earnings guidance assumes sales demand will remain near the levels experienced during the past several quarters, adjusted for seasonality, and that it will experience a slightly negative price/cost relationship, due to increased cost of old corrugated containers (OCC). Although the Company believes the assumptions reflected in the range of guidance are reasonable, it cautions the reader that the outlook, given the volatility of OCC and plastic resin prices, as well as uncertain global economic conditions, remains equally uncertain, and there is a risk that actual results could vary substantially.
Commenting on the Company’s outlook, DeLoach said, “While we have shown significant year-over-year improvement in sales and earnings during the past four consecutive quarters as the general global economy has improved, the 2010 fourth quarter will be the first tough comparison since the recession ended in 2009. In addition, OCC prices have strengthened entering the fourth quarter which could cause some short-term headwinds as we work to recover those higher prices. Our guidance also reflects a continuation of good performance in our Consumer Packaging segment and weak results in Packaging Services.”
Segment Review
Segment operating results do not include restructuring and asset impairment charges, interest income and expense, or income taxes.
Consumer Packaging
Sonoco’s Consumer Packaging segment includes the following products and services: round and shaped rigid containers and trays (both composite and plastic); printed flexible packaging; metal and peelable membrane ends and closures; and global brand artwork management.
Third quarter 2010 sales for the segment were $437 million, compared with $399 million in the same period in 2009. Segment operating profit was $44.8 million in the third quarter, compared with $42.6 million in the same period in 2009.
Sales grew 9 percent during the third quarter due primarily to the previously mentioned acquisition of APT. Operating profit grew 5 percent and benefited from the acquisition, lower pension costs, higher selling prices and productivity improvements. These improvements were partially offset by higher labor, freight and other costs.
Tubes and Cores/Paper
The Tubes and Cores/Paper segment includes the following products: high-performance paper and composite paperboard tubes and cores; fiber-based construction tubes and forms; recycled paperboard, linerboard, corrugating medium, recovered paper and other recycled materials.
Third quarter 2010 sales for the segment were $412 million, compared with $346 million in the same period in 2009. Operating profit for this segment was $37.8 million, compared with $21.4 million in 2009.
The 19 percent increase in segment sales was due largely to increased selling prices, an improvement in volume of global industrial converted products and paperboard, and the addition of sales of corrugating medium, partially offset by the negative impact of foreign currency translation. The year-over-year increase in selling prices was primarily a result of higher selling prices for OCC, which had a favorable impact on the sales of recovered paper, paperboard and tubes and cores. Operating profit for the segment improved 76 percent during the quarter due to global volume growth, lower pension costs and productivity improvements.
Packaging Services
The Packaging Services segment includes the following products and services: designing, manufacturing, assembling, packing and distributing temporary, semipermanent and permanent point-of-purchase displays; and supply chain management services, including contract packing, fulfillment and scalable service centers.
Third quarter 2010 sales for this segment were $112 million, compared with $113 million in the same period in 2009. Segment operating profit was $1.9 million, compared with $5.4 million in 2009.
Sales were essentially flat during the quarter as higher volume was offset by the negative impact of foreign currency translation and lower sales prices. Operating profit declined as a result of lower selling prices and a negative mix of business, partially offset by productivity improvements.
All Other Sonoco
All Other Sonoco includes businesses that are not aggregated in a reportable segment and includes the following products: wooden, metal and composite wire and cable reels and spools; molded and extruded plastics; custom-designed protective packaging and paper amenities, such as coasters and glass covers.
Third quarter 2010 sales in All Other Sonoco were $91 million, compared with $72 million reported in the same period in 2009. Operating profit for the quarter was $12.5 million, compared with $5.4 million in 2009.
Sales in All Other Sonoco increased 26 percent due to volume gains in molded plastics, protective packaging and reels and spools, along with acquisition sales and higher selling prices. Operating profit in All Other Sonoco increased 130 percent as a result of strong volume and productivity gains in all businesses. These favorable factors were partially impacted by higher raw material costs, which were not covered by higher selling prices.
Corporate
Net interest expense for the third quarter of 2010 declined to $8.4 million, compared with $9.4 million during the same period in 2009. The decrease was due to lower interest rates. The effective tax rate for the third quarter of 2010 was 27.6 percent, compared with 25.1 percent for the same period in 2009, while the effective tax rate on base earnings was 29.6 percent and 25.1 percent in the third quarters of 2010 and 2009, respectively. The effective tax rate for the current quarter is higher than the same period last year primarily as a result of a larger proportion of earnings taxed at higher U.S. rates, as well as the recognition in the quarter of a reduced U.S. manufacturing deduction resulting from projected pension contributions.