Packaging

Sonoco Reports Improved 2010 Fourth Quarter and Strong Full-Year Results

Thursday 10. February 2011 - Sonoco (NYSE: SON), one of the largest diversified global consumer and industrial packaging companies, today reported improved 2010 fourth quarter and strong full-year results.

Fourth Quarter Highlights
Fourth quarter 2010 GAAP earnings per diluted share were $.33, compared with $.46 in 2009.
Fourth quarter 2010 GAAP results include after-tax charges of $.31 per diluted share related to a debt tender completed during the quarter, restructuring charges and acquisition costs totaling $.05 per diluted share and one-time tax benefits of $.10 per diluted share.
Base net income attributable to Sonoco (base earnings) for fourth quarter 2010 was $.59 per diluted share, compared with $.58 in 2009. (See base earnings definition and reconciliation later in this release.)
Fourth quarter 2010 net sales of $1.13 billion were 13 percent higher than the $1.0 billion in 2009.
Full-Year Highlights
Full-year 2010 GAAP earnings per diluted share were $1.96, compared with $1.50 in 2009.
Full-year 2010 GAAP results include after-tax impairment, restructuring, debt tender and acquisition charges along with certain tax adjustments totaling $.38 per diluted share, compared with $.28 per diluted share in 2009.
Base earnings for 2010 were $2.34 per diluted share, up 31 percent, compared with $1.78 in 2009.
Record net sales of $4.1 billion in 2010, were up 15 percent, compared to $3.6 billion in 2009.
First quarter 2011 guidance is $.55 to $.60 per diluted share. Guidance for full-year 2011 base earnings remains $2.52 to $2.62 per diluted share.
Fourth Quarter Review
Commenting on the Company’s fourth quarter results, Chairman and Chief Executive Officer Harris E. DeLoach, Jr. said, “For the fifth consecutive quarter, we posted year-over-year improvement in net sales and base earnings. Our modest fourth quarter base earnings improvement was a result of manufacturing productivity, improved volume and lower pension costs, which were partially offset by a negative price/cost relationship and a higher base effective tax rate.”
“Our industrial-focused businesses continued to lead our improved performance as operating profits in our Tube and Core/Paper segment improved 42 percent, and All Other Sonoco, which consists primarily of industrial-related businesses, reported a 36 percent year-over-year improvement,” said DeLoach. “Most of our industrial businesses delivered both volume growth and productivity gains. However, these items were partially offset by a negative price/cost relationship stemming primarily from higher costs for old corrugated containers, our largest raw material cost, which we were unable to fully recover through higher selling prices.”
“On the consumer side, our Consumer Packaging segment posted the second-highest quarterly operating profit in its history; only outdone by last year’s record fourth-quarter results,” DeLoach continued. “Volume was down modestly from last year’s record levels and the segment experienced moderate operating cost inflation. These negative factors were partially offset by improvements in productivity and operating earnings from acquisitions. Results declined in our Packaging Services segment due to a negative change in the mix of business stemming from previously announced business losses in point-of-purchase displays and fulfillment, the earnings impact of which was only partially offset by new business and productivity improvements.”
Fourth quarter GAAP net income attributable to Sonoco was $34.5 million, or $.33 per diluted share in 2010, compared with $47.1 million, or $.46 per diluted share, in 2009. Base earnings were $60.8 million, or $.59 per diluted share, in the fourth quarter, compared with $58.9 million, or $.58 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, debt tender costs, 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.
Items excluded from base earnings in the fourth quarter of 2010 include costs and after-tax charges totaling $31.6 million, or $.31 per diluted share, related to the Company’s debt tender completed in November. Also excluded from current quarter base earnings were after-tax restructuring and acquisition charges totaling $4.9 million ($.05 per diluted share) and tax benefits of $5.5 million ($.05 per diluted share) related to a regulatory clarification of a 2009 tax law change in Mexico and $4.7 million ($.05 per diluted share) related to the release of a valuation allowance on capital loss carry forwards. Excluded from base earnings per share in the 2009 quarter were an after-tax restructuring charge of $.07 and a $.05 charge related to the original 2009 tax law change in Mexico. 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 gross profit margin in the fourth quarter of 2010 was 17.7 percent of sales, compared to 19.3 percent in the same period in 2009. The decline was due primarily to higher raw material, energy, freight and other costs. The Company’s selling and administrative costs declined to 9.8 percent of sales during the fourth quarter, compared to 10.5 percent in the same period last year.
Net sales for the fourth quarter were $1.13 billion, compared with $1.0 billion in the same period in 2009. This 13 percent increase was due to higher selling prices, acquisitions, improved volumes and open-market sales of corrugating medium previously produced under a cost-plus-fixed-management-fee arrangement. 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 fourth quarter was $114.6 million, compared with $33.1 million in the same period in 2009. The year-over-year increase was due primarily to a voluntary contribution made in 2009 to the Company’s U.S. pension plan which had an annual after-tax impact of $63 million. Capital expenditures and cash dividends paid to shareholders were $44.8 million and $28.3 million, respectively, during the fourth quarter of 2010, compared with $21.3 million and $27.0 million, respectively, in the same period in 2009. During the fourth quarter of 2010, Sonoco also repurchased 695,000 shares of common stock for approximately $23 million, as part of a previously announced program to repurchase up to two million shares of stock by the end of the first quarter of 2011.
2010 Review
For the year ending December 31, 2010, net sales reached a record $4.1 billion, an increase of 15 percent, compared with $3.6 billion in 2009. Net income attributable to Sonoco for 2010 was $201.1 million ($1.96 per diluted share), compared with $151.5 million ($1.50 per diluted share) in 2009. Earnings for 2010 were negatively impacted by the previously mentioned after-tax charge of $31.6 million ($.31 per diluted share) associated with the debt tender and $16.9 million ($.17 per diluted share) in after-tax asset impairment, restructuring and acquisition charges, partially offset by the previously mentioned tax benefits of $10.2 million ($.10 per diluted share). 2009 earnings were negatively impacted by after-tax restructuring charges of $23.0 million ($.23 per diluted share) and the $5.3 million charge ($.05 per diluted share) related to the tax law change in Mexico.
Full-year base earnings were $239.4 million ($2.34 per diluted share), compared with $179.8 million ($1.78 per diluted share) in 2009. Significantly higher Companywide volumes, strong productivity, lower pension costs and the impact from acquisitions drove the 33 percent year-over-year improvement in base earnings. These favorable factors were offset by a negative price/cost relationship resulting from higher raw material, energy, freight and other costs which the Company was unable to fully recover through higher selling prices. Gross profit as a percent of sales was 18.6 percent, compared with 18.5 percent in 2009. Selling and administrative expenses were 9.8 percent of sales, compared with 10.5 percent in 2009.
Cash generated from operations during 2010 was $375.1 million, compared with $391.0 million in 2009. Higher earnings in 2010 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. In 2010, capital expenditures and cash dividends were $145.9 million and $111.8 million, respectively, compared with $104.2 million and $107.9 million, respectively, in 2009. In addition, the Company used cash to fund acquisitions totaling $138 million and $6 million in 2010 and 2009, respectively. The Company also used $23 million in cash in 2010 to repurchase common stock.
During the fourth quarter, the Company entered into a new five-year syndicated bank facility to replace an existing facility that would have expired in May 2011. The bank facility supports the Company’s $350 million commercial paper program, under which $30 million was outstanding at yearend. Also during the quarter, the Company issued $350 million of new 5.75% thirty-year bonds, and used the majority of the proceeds to tender for and redeem early approximately 55 percent of its other outstanding bonds. Additionally, the Company redeemed $100 million of 6.75% bonds that matured in November. At December 31, 2010, total debt was $621 million, compared with $581 million as of the end of December 31, 2009. The Company’s debt-to-total capital ratio as of December 31, 2010, was 29.2 percent compared with the 29.6 percent at the end of 2009. At year end, cash and cash equivalents totaled $158 million, compared with $185 million at the end of 2009.
“2010 was an extremely strong turnaround year for Sonoco,” commented DeLoach. “Sales reached a record level while growing 15 percent, which was our highest growth rate in 15 years. Base earnings improved by 33 percent and reached the second best performance in Company history. Base earnings before interest and taxes (EBIT) margins gained 100 basis points, withstanding a significant negative price/cost headwind. Our two largest segments–Tubes and Cores/Paper and Consumer Packaging–saw sales grow by 23 percent and 8 percent and operating profits grow by 80 percent and 6 percent, respectively. And, our Consumer Packaging segment produced record operating profits for the third year in a row.”
“Clearly, this performance says a lot about our strategy,” added DeLoach. “But more importantly, it says a lot about our people. I’m extremely proud of the way our employees responded going into, and especially, coming out of the recession. Entering 2011, we are firmly back on track and ready to grow. We remain focused on meeting our long-term growth goals while improving returns to our shareholders.”
First Quarter and Full-Year 2011 Outlook
Sonoco expects first quarter 2011 base earnings to be in the range of $.55 to $.60 per diluted share. Base earnings in the first quarter of 2010 were $.50 per diluted share. For the full-year 2011, base earnings are projected to be in the range of $2.52 to $2.62 per diluted share, which is the same guidance the Company provided on December 3, 2010. The Company’s 2011 earnings guidance reflects an expected effective tax rate of 31 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 a neutral price/cost relationship. Although the Company believes the assumptions reflected in the range of guidance are reasonable, given the volatility of recovered paper and other material prices, as well as uncertain global economic conditions, actual results could vary substantially.
Commenting on the Company’s outlook, DeLoach said, “First quarter results have historically been the Company’s weakest. That said, our guidance reflects continued modest volume improvement. As previously announced, we expect year-over-year weakness in our Packaging Services segment due to the loss of certain business. Overall, we are expecting a strong year in 2011 with base earnings growing by approximately 10 percent, a growth rate much like what we experienced coming out of the last recession.”
Segment Review
Segment operating results do not include restructuring and asset impairment charges, acquisition costs, interest income and expense, debt tender charges 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.
Fourth quarter 2010 sales for the segment were $458 million, compared with $421 million in the same period in 2009. Segment operating profit was $45.7 million in the fourth quarter, compared with $48.8 million in the same period in 2009.
Sales increased by 9 percent during the fourth quarter due entirely to the acquisition of Associated Packaging Technologies, a leading thermoform tray manufacturer for the frozen food industry, partially offset by a slight decline in volume. Operating profits declined 6 percent from the previous year’s record results. Lower volume and higher operating costs more than offset the positive impact of the acquisition, lower pension costs and productivity improvements during the 2010 quarter.
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.
Fourth quarter 2010 sales for the segment were $447 million, compared with $381 million in the same period in 2009. Operating profit for this segment was $33.9 million, compared with $23.8 million in 2009.
The 17 percent increase in segment sales was due largely to increased selling prices, an improvement in volume of industrial converted products, paperboard, and recycled materials along with the addition of sales of corrugating medium. The year-over-year increase in selling prices was primarily a result of higher old corrugated container pricing, which had a favorable impact on prices received for recovered paper, paperboard and tubes and cores. Operating profit for the segment improved 42 percent during the quarter due to volume growth, lower pension costs and productivity improvements. Offsetting that improvement was a negative price/cost relationship, increased operating costs and the impact of a November fire that destroyed our molded plug manufacturing facility.
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.
Fourth quarter 2010 sales for this segment were $131 million, compared with $125 million in the same period in 2009. Segment operating profit was $1.9 million, compared with $4.0 million in 2009.
Sales improved modestly during the quarter due to net volume and mix impacts in our contract packaging and international point-of-purchase displays businesses. Operating profit declined due primarily to a negative change in the mix of business which offset the volume improvement.
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.
Fourth quarter 2010 sales in All Other Sonoco were $91 million, compared with $75 million reported in the same period in 2009. Operating profit for the quarter was $11.4 million, compared with $8.4 million in 2009. Sales in All Other Sonoco increased 21 percent due to volume gains in molded plastics and reels and spools, along with sales from a small acquisition and higher selling prices. Operating profit in All Other Sonoco increased 36 percent as a result of improved volume, productivity gains and lower pension expenses. These favorable factors were partially offset by higher raw material costs, which were not covered by higher selling prices.
Corporate
Net interest expense for the fourth quarter of 2010 increased to $9.7 million, compared with $9.5 million during the same period in 2009. The increase was due to higher debt levels and interest rates. The effective tax rate for the fourth quarter of 2010 was a benefit of (8.2) percent, compared with 36.0 percent for the same period in 2009. The lower effective rate was driven by the released valuation allowance and the clarification of the tax law change in Mexico. The effective tax rate on base earnings was 31.6 percent and 28.7 percent in the fourth quarters of 2010 and 2009, respectively. The effective tax rate on base earnings 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. For the year, the effective tax rate was 25.3 percent, compared with 31.2 percent in 2009, due in part to the reduction in the valuation allowance and the regulatory clarification discussed previously, while effective tax rate on base earnings was 30.8 percent, compared with 29.0 percent in 2009.