Business News

Sonoco Reports 2009 Third Quarter Financial Results

Friday 23. October 2009 - Consumer Packaging Segment Achieves Record Quarterly Operating Profits; Company Updates Full-Year Earnings, Free Cash Flow Estimates

Sonoco (NYSE: SON), one of the largest diversified global packaging companies, today reported third quarter 2009 earnings of $.47 per diluted share, compared with $.57 per diluted share reported in the third quarter of 2008. Results in the current year’s quarter were impacted by higher pension expense and lower Companywide volumes, particularly in businesses serving recession-impacted industrial markets.

Quarterly Results

Base earnings for the third quarter of 2009 were $.50 per diluted share, compared with $.60 per diluted share reported in the same period in 2008. Base earnings and base earnings per diluted share are non-GAAP financial measures that exclude restructuring charges, asset impairment charges, and certain non-recurring or infrequent and unusual items, as applicable. Base earnings per diluted share for 2009 include a year-over-year increase in after-tax pension expense of $.08 per diluted share. Excluded from base earnings in each of the 2009 and 2008 quarters were respective after-tax restructuring charges of $.03 per diluted share. Additional information about base earnings and base earnings per share along with reconciliations to the most closely applicable GAAP financial measure is provided later in this release.

“We are reporting better than projected results, as base earnings per diluted share exceeded the top end of our previously announced guidance of $.43 to $.47. These results reflect record performance in our Consumer Packaging segment, which for the seventh straight quarter reported a year-over-year improvement in operating profits,” said Harris E. DeLoach Jr., chairman, president and chief executive officer. “However, the global recession continues to have a greater impact on our businesses that serve industrial markets and our Packaging Services segment, where lower results compared to the prior year more than offset the gains in our Consumer Packaging segment. On a positive note, business in our Tubes and Cores/Paper segment has picked up significantly from first quarter levels.”

Net sales were $930.6 million, a decline of 12 percent (8 percent excluding the impact of foreign currency translation), compared with $1.06 billion in the same quarter last year. “Sales declined from last year’s levels due to recession-impacted Companywide volumes, particularly in our industrial-focused businesses, and lower selling prices due primarily to the pass-through of lower recovered paper costs,” said DeLoach.

Net income attributable to Sonoco for the third quarter of 2009 was $47.7 million, compared with $57.3 million for the same period in 2008. Base earnings in 2009 were $50.9 million, compared with $60.6 million last year. Higher pension expense in 2009 reduced base earnings by $8 million when compared with the same period in 2008. Base earnings exclude after-tax restructuring charges of $3.2 million and $3.3 million in 2009 and 2008, respectively. Gross profit margin improved to 18.6 percent of sales, from 17.4 percent in the same period in 2008.

“Despite generally low volumes and higher pension expenses, overall gross profit margin for the quarter was at the highest level since the second quarter of 2007,” said DeLoach. “This improvement was a result of our continued focus on managing the selling price/material cost relationship, driving productivity and reducing fixed and variable costs throughout the Company.”

Third quarter 2009 cash generated from operations was $176 million, compared with $166 million in 2008. Although quarter-over-quarter earnings were lower, the impact on operating cash flow was largely buffered by noncash items, primarily higher current year noncash pension and postretirement expenses. Operating cash flow improvements due to current quarter changes in working capital and other assets and liabilities offset a $25 million non-recurring benefit received in 2008 from insurance settlements related to an environmental claim. Capital expenditures and cash dividends were $25 million and $27 million, respectively, compared with $29 million and $27 million, respectively in last year’s third quarter. Repayment of debt totaled $56 million during the quarter, compared with $37 million last year.

Year-to-Date Results

For the nine-month period ending September 27, 2009, net sales were $2.60 billion, a decline of 19 percent (13 percent excluding the impact of foreign currency translation), compared with $3.19 billion in 2008. Net income attributable to Sonoco was $104.4 million ($1.03 per diluted share) in 2009, compared with $128.6 million ($1.27 per diluted share) in 2008. Earnings in 2009 were negatively impacted by after-tax restructuring charges of $16.6 million ($.17 per diluted share) and higher year-over-year pension expense. 2008 earnings were negatively impacted by a $31 million ($.31 per diluted share) after-tax, noncash impairment charge related to the Company’s remaining financial interest in the 2003 sale of its high density film business and $17.7 million ($.17 per diluted share) in after-tax restructuring charges.

2009 base earnings were $121.0 million ($1.20 per diluted share), compared with $177.3 million ($1.75 per diluted share) in 2008. Lower Companywide volumes and increased pension costs of $26 million after-tax ($.25 per diluted share) more than offset a favorable price/cost relationship and productivity improvements during the period. Gross profit as a percent of sales was 18.2 percent, compared with 17.7 percent in 2008.

Cash generated from operations was $358 million in 2009, compared with $310 million in 2008. Capital expenditures and cash dividends paid were $83 million and $81 million, respectively, in 2009, compared with $92 million and $80 million, respectively, in 2008. Cash used to reduce debt during 2009 totaled $104 million. The Company’s calculation of debt to total capital declined to 31.0 percent at September 27, 2009, compared with 37.0 percent at December 31, 2008.

As of the end of the third quarter of 2009, cash and cash equivalents totaled $194 million, compared with $102 million at December 31, 2008. At September 27, 2009, no borrowings were outstanding under the Company’s $500 million commercial paper program. The commercial paper program is fully supported by a bank credit facility provided by a syndicate of banks that is committed until May 2011.

Fourth Quarter and Updated Full-Year 2009 Outlook

Sonoco expects fourth quarter 2009 base earnings to be in the range of $.42 to $.47 per diluted share. Base earnings in the fourth quarter of 2008 were $.49 per diluted share. Full-year 2009 base earnings are projected to be in the range of $1.62 to $1.67 per diluted share, compared with the Company’s previous expectations of $1.55 to $1.65 per diluted share. As previously reported by the Company, fourth quarter and full-year guidance include a year-over-year increase in after-tax pension expense of $.10 and $.35 per diluted share, respectively. The Company’s 2009 fourth quarter earnings guidance reflects an expected tax rate of approximately 31 percent, which is above the third quarter and year-to-date effective rates of 25.1 percent and 29 percent, respectively.

Year-to-date free cash flow (operating cash flow less dividends and capital expenditures) was $194 million, compared with $138 million during the same period last year. The Company expects to make an additional voluntary cash contribution of at least $50 million to its U.S. pension plan by year end. Excluding this additional pension contribution, free cash flow for 2009 should exceed $200 million, compared with $150 million for 2008. The Company’s updated earnings and free cash flow guidance assumes sales demand will remain near the levels experienced late in the third quarter and ongoing cost-reduction efforts are successful. Although the Company believes the assumptions reflected in the range of guidance are reasonable, the outlook, given the current economic environment, is uncertain.

“While we have seen sequential improvement in results over the past two quarters, we remain cautious about the impact this lingering global recession is having on overall demand, particularly in our industrial markets,” said DeLoach. “Because of our focused efforts to adjust our manufacturing footprint and drive sustainable operating efficiencies, we believe the Company is better positioned to effectively leverage any improvement in volumes with greater impact to the bottom line.”

Segment Review

The Company uses a non-GAAP financial measure, base operating profit, when discussing the operational results of its segments. Base operating profit is defined as the segments’ portion of consolidated Income Before Income Taxes, excluding restructuring and impairment charges, net interest expense and certain non-recurring or infrequent and unusual items. A reconciliation of base operating profit to GAAP Income Before Income Taxes for the Company’s three reportable segments and All Other Sonoco is provided later in this release.

Consumer Packaging

Sonoco’s Consumer Packaging segment includes the following products: round and shaped rigid packaging (both composite and plastic); printed flexible packaging; and metal and peelable membrane ends and closures.

Third quarter 2009 sales for the segment were $395 million, compared with $399 million in the same period in 2008. Base operating profit for this segment was a record $42.0 million in the third quarter of 2009, compared with $28.9 million in the same period in 2008.

Compared to last year, sales in this segment were essentially flat during the third quarter. Lower volumes and a negative effect of foreign currency translation of approximately $8 million were essentially offset by higher selling prices implemented to offset higher manufacturing and raw materials costs. Base operating profit benefited from a favorable price/cost relationship and productivity improvements, which together, more than offset the negative impact of lower volume and higher pension 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, recovered paper and other recycled materials.

Third quarter 2009 sales for the segment were $346 million, compared with $436 million in the same period in 2008. Third quarter base operating profit for this segment was $21.5 million, compared with $42.0 million in 2008.

The 20 percent decline in segment sales was due to volume declines in North America and Europe, a negative foreign currency translation effect of approximately $22 million and lower prices, especially for products related to recovered paper. Base operating profits were reduced due to the impact of lower volume and higher pension costs. Further reducing quarterly results was a negative price/cost variance driven by rising recovered paper costs.

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; brand artwork management; and supply chain management services, including contract packing, fulfillment and scalable service centers.

Third quarter 2009 sales for this segment were $117 million, compared with $135 million in the same period in 2008. Base operating profit for this segment was $6.0 million, compared with $9.1 million in 2008.

Sales in this segment were affected by lower volumes in the Company’s contract packing operations along with a negative foreign currency translation effect of approximately $13 million. Base operating profits decreased primarily due to an unfavorable shift in the mix of business and higher pension costs.

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, molded and extruded plastics, custom-designed protective packaging and paper amenities such as coasters and glass covers.

Third quarter 2009 sales in All Other Sonoco were $72 million, compared with $94 million reported in the same period in 2008. Third quarter base operating profit was $5.4 million in 2009, compared with $11.8 million in 2008.

Sales in All Other Sonoco declined during the quarter due to lower volumes and prices in wire and cable reels, molded plastics and protective packaging. Base operating profit in All Other Sonoco declined as lower volumes, reduced selling prices and higher pension costs more than offset productivity improvements and reduced material costs.

Corporate

Net interest expense for the third quarter of 2009 declined to $9.4 million, compared with $10.6 million during the same period in 2008. The decrease was due to lower debt levels and lower interest rates. The effective tax rate for the Company for the third quarter of 2009 was 25.1 percent, compared with 28.9 percent in the same period in 2008. The lower tax rate was primarily a result of favorable tax adjustments recorded in the quarter related to expirations of statutes of limitation and changes in the geographic distribution of earnings. Although the lower tax rate was in line with expectations, it did have a favorable impact of approximately $.03 per diluted share to base earnings compared to the prior year quarter.