Sonoco Reports Lower 2Q Earnings on Weak Market
July 16, 2009 - Sonoco today reported second quarter 2009 earnings of $.33 per diluted share, compared with $.57 per diluted share reported in the second quarter of 2008. Results in the current year’s quarter were impacted by higher pension, restructuring and lower Companywide volumes.
Base earnings for the second quarter of 2009 were $.41 per diluted share, compared with $.62 per diluted share reported in the same period in 2008. Base earnings per diluted share and base earnings are non-GAAP financial measures that exclude restructuring charges, asset impairment charges, environmental charges and certain nonrecurring or infrequent and unusual items, as applicable. Base earnings for the 2009 second quarter reflect a year-over-year increase in after-tax pension expense of $.08 per diluted share. Excluded from base earnings in the 2009 period was an after-tax restructuring charge of $.07 per diluted share, stemming from previously announced plant closings and other cost-reduction measures. Base earnings in the second quarter of 2008 excluded an after-tax charge of $.05 per diluted share associated with restructuring initiatives. 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 pleased to report better than expected results in the second quarter as base earnings per diluted share exceeded the upper end of our previously announced guidance of $.34 to $.38. For the sixth consecutive quarter our Consumer Packaging segment, which is our largest business segment, representing nearly 44 percent of net sales, reported year-over-year improvement in operating profits, with second quarter segment results up nearly 20 percent,” said Harris E. DeLoach Jr., chairman, president and chief executive officer. “However, this improvement was more than offset by the continued impact of the global recession on our businesses that serve industrial markets and disappointing results from our Packaging Services segment. That said, we began to see some improvement in our industrial-focused markets at the end of the second quarter for the first time since October 2008.”
Net sales for the second quarter of 2009 declined 21 percent (15 percent excluding the impact of foreign currency translation) to $864 million, compared with $1.09 billion in the same period last year. “Lower Companywide volumes, particularly in our industrial-focused businesses, continued to be the primary drivers impacting sales,” said DeLoach. “Although conditions were weaker year-over-year in served markets, we were pleased that new product sales increased approximately $13 million, or 41 percent year-over-year, most of which was in the Consumer Packaging segment.”
Net income attributable to Sonoco for the second quarter of 2009 was $33.6 million, compared with $58.0 million for the same period in 2008. Second quarter 2009 base earnings were $40.9 million, compared with $62.6 million last year. Base earnings for the current quarter exclude after-tax restructuring charges of $7.3 million, while 2008 second quarter base earnings excluded $4.6 million in impairment and restructuring charges, after tax. The higher pension expense in 2009 reduced base earnings by $8.1 million when compared to the same period in 2008.
“Lower Companywide volumes and higher pension expenses were partially offset by a positive selling price/ material cost relationship and productivity improvements,” said DeLoach. “We also benefited from previously announced cost-reduction actions focused on aligning our manufacturing footprint to reflect projected business activity, and implementing other contingency initiatives including freezing salaries, temporarily suspending 401(k) matches and further curtailing discretionary spending. These actions are reflected in the second quarter’s gross profit, which as a percent of sales, was 18.3 percent, compared with 17.9 percent in the same period in 2008.”
Cash generated from operations in the second quarter of 2009 was $106.4 million, compared with $79.8 million in the same period in 2008. The impact on cash flow of lower quarter-over-quarter earnings was largely offset by an increase in liabilities associated with higher noncash pension expense and a change in deferred taxes. Improvements in working capital, particularly inventories, accounted for the vast majority of the quarter-over-quarter increase in operating cash flow. Capital expenditures and cash dividends paid totaled $22.7 million and $27.0 million, respectively, in the second quarter of 2009, compared with $28.8 million and $26.9 million, respectively, in the second quarter of 2008.
For the first six months of 2009, net sales declined 22 percent (16 percent excluding the impact of foreign currency translation) to $1.66 billion, compared with $2.12 billion in the first half of 2008. Net income attributable to Sonoco for the first six months of 2009 was $56.7 million ($.56 per diluted share), compared with $71.2 million ($.71 per diluted share) in the same period in 2008. Earnings for the first six months of 2009 were negatively impacted by after-tax restructuring charges of $13.3 million ($.13 per diluted share) and higher year-over-year pension expense. Earnings in the 2008 period were negatively impacted by a $31.0 million ($.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 $14.5 million ($.14 per diluted share) in after-tax restructuring charges.
Base earnings for the first half of 2009 were $70.1 million ($.70 per diluted share), compared with $116.7 million ($1.16 per diluted share) in the first half of 2008. Lower Companywide volumes and increased after-tax pension costs of $17.2 million ($.17 per diluted share) more than offset higher selling prices and productivity improvements during the period. Gross profit as a percent of sales was 18.0 percent, compared with 17.9 percent in the first half of 2008.
For the first six months of 2009, cash generated from operations was $181.9 million, compared with $143.9 million in the same period in 2008. Capital expenditures and cash dividends paid were $57.4 million and $53.9 million, respectively, for the first half of 2009, compared with $62.9 million and $52.7 million, respectively, in the first half of 2008. Cash used to reduce debt during the first half of 2009 totaled $47.9 million, and the Company’s calculation of debt-to-total-capital declined to 34.2 percent at June 28, 2009, compared with 37.0 percent at December 31, 2008.
As of the end of the second quarter, cash and cash equivalents totaled $111 million, compared with $102 million at December 31, 2008. Sonoco continues to operate its $500 million commercial paper program with $54 million outstanding at the end of the second quarter of 2009. The commercial paper program is fully supported by a bank credit facility provided by a syndicate of banks that is committed until May 2011. The Company continues to believe these banks are capable of meeting their commitments.
Third Quarter and Full-Year 2009 Outlook
Sonoco expects third quarter 2009 base earnings to be in the range of $.43 to $.47 per diluted share. Base earnings in the third quarter of 2008 were $.60 per diluted share. Full-year 2009 base earnings are projected to be in the range of $1.55 to $1.65 per diluted share. As previously reported by the Company, third quarter and full-year guidance include a year-over-year increase in pension expense of $.08 and $.35 per diluted share, respectively. The Company’s 2009 annual earnings guidance reflects an expected tax rate of approximately 30 percent.
The Company’s updated guidance assumes ongoing sales demand will remain near the levels noted late in the second quarter, as well as the realization of previously announced cost-reduction plans and the impact of normal seasonality. Although the Company believes the assumptions reflected in the range of guidance for the full year are reasonable, the outlook, given today’s economic environment, is very uncertain.
“While we were encouraged by the sequential improvement in our second quarter results, we are extremely cautious about the global economy and the impact the lingering recession is having on consumers and our customers,” said DeLoach. “We remain focused on improving areas we can control and are implementing further initiatives that are aimed at simplifying our business structure to scale the Company for profitable growth, improving innovation and creating sustainable operating efficiencies.”