Sonoco Posts Fourth Quarter Profit
Feb. 10, 2010 - Sonoco today reported fourth quarter 2009 earnings of $.46 per diluted share, compared with $.36 per diluted share reported in the fourth quarter of 2008. Full-year earnings for 2009 were $1.50 per diluted share, compared with $1.63 per diluted share in 2008.
FOURTH QUARTER RESULTS
Base net income attributable to Sonoco (base earnings) for the fourth quarter of 2009 was $.58 per diluted share, compared with $.49 per diluted share reported in the same period in 2008. Base earnings and base earnings per diluted share are non-GAAP financial measures adjusted to remove restructuring charges, asset impairment charges, and other items, if any, the exclusion of which management believes improves comparability and analysis of the underlying financial performance of the business. Excluded from base earnings per share in the 2009 quarter were after-tax restructuring charges of $.07 and a $.05 charge related to a retrospective tax-law change in Mexico. After-tax restructuring charges of $.13 per diluted share were excluded from base earnings per share in the 2008 quarter. 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. Base earnings have not been adjusted for a significant increase in pension costs and, as such, include a year-over-year increase in after-tax pension expense of $.07 per diluted share for the quarter.
“We performed well in the fourth quarter as Companywide volumes grew year over year and we benefited from strong productivity. Base earnings per diluted share exceeded the top end of our previously announced guidance of $.49 to $.52 due to a slightly improved operating environment and a lower than anticipated effective tax rate,” said Harris E. DeLoach Jr., chairman, president and chief executive officer. “Operating profits from our Consumer Packaging segment were a record high, continuing a string of eight consecutive quarters of year-over-year improvement. Results in our Tubes and Cores/Paper segment were lower as contractual sales price resets last year occurred immediately prior to a significant drop in the cost of old corrugated containers (OCC), our primary raw material, creating a favorable price/cost relationship in 2008 that was not repeated in 2009. On the positive side, the Tubes/Cores and Paper segment benefited from productivity improvements and improved volume.”
Net sales for the fourth quarter were $1.0 billion, compared with $935 million in the same quarter of last year. “Sales increased 7 percent during the quarter due to improved volumes in our Tube and Cores/Paper, Consumer Packaging and Packaging Services segments along with the favorable impact of foreign currency rates, partially offset by lower selling prices in the Tubes and Cores/Paper segment,” DeLoach said.
Net income attributable to Sonoco for the fourth quarter of 2009 was $47.1 million, up 31 percent, compared with $36.0 million for the same period in 2008. Base earnings were $58.9 million, up 20 percent, compared with $49.1 million in last year’s quarter. Higher pension expense in 2009 reduced base earnings by $7.4 million after tax when compared with the same period in 2008. 2009 base earnings exclude after-tax restructuring charges of $6.4 million and a $5.3 million charge related to a retrospective tax-law change in Mexico. 2008 base earnings exclude after-tax restructuring charges of $13.1 million. The gross profit margin improved to 19.3 percent of sales, from 16.9 percent in the same period in 2008, primarily as a result of volume improvements, productivity initiatives and reduced fixed costs from restructuring actions.
Cash generated from operations in the fourth quarter was $33.1 million, compared with $69.2 million in the same period of 2008. During the current quarter, the Company made a voluntary contribution of $100 million to its U.S. pension plan which, after tax, reduced cash from operations for the full year by approximately $63 million. Absent the pension contribution, operating cash flow would have improved year over year due to higher earnings and changes in other assets and liabilities. Capital expenditures and cash dividends were $21.3 million and $27.0 million, respectively, during the fourth quarter, compared with $31.6 million and $26.9 million, respectively, the same period of 2008.
For the year ending December 31, 2009, net sales were $3.6 billion, a decline of 13 percent (of which 4 percent can be attributed to the impact of foreign currency translation), compared with $4.1 billion in 2008. Net income attributable to Sonoco was $151.5 million ($1.50 per diluted share) in 2009, compared with $164.6 million ($1.63 per diluted share) in 2008. Earnings in 2009 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. 2008 earnings 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 $30.8 million ($.30 per diluted share) in after-tax asset impairment and restructuring charges.
Full-year base earnings were $179.8 million ($1.78 per diluted share), compared with $226.4 million ($2.24 per diluted share) in 2008. Lower Companywide volumes and increased pension costs of $33.0 million ($.33 per diluted share) more than offset productivity improvements and a favorable price/cost relationship during the year. Gross profit as a percent of sales was 18.5 percent, compared with 17.6 percent in 2008. Despite the $100 million voluntary pension contribution, cash generated from operations was $391.0 million, exceeding the $379.4 million generated in 2008. Capital expenditures and cash dividends paid were $104.2 million and $107.9 million, respectively, in 2009, compared with $123.1 million and $106.6 million, respectively, in 2008. Cash used to reduce debt during 2009 totaled $116.2 million. At December 31, 2009, total debt was $581 million, compared with $690 million at the end of 2008. The Company’s debt-to-total capital ratio declined to 29.6 percent as of December 31, 2009, compared with 37.0 percent at December 31, 2008.
As of the end of 2009, cash and cash equivalents totaled $185 million, compared with $102 million at December 31, 2008. At year end, 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.
“2009 was one of the most difficult, and yet, one of the more rewarding years for Sonoco,” said DeLoach. “The global recession significantly impacted volumes Companywide and particularly in our businesses which serve industrial markets. In response, we moved quickly to reduce structural costs and size our manufacturing footprint to the new market realities. In addition, we realigned our businesses and streamlined our management organization. By proactively ‘managing the guts’ of our business, we achieved record productivity and improved annual gross profit margins to the highest levels since 2006. These actions, together with aggressively managing working capital, allowed us to make the $100 million voluntary contribution to fund our pension plan, without which operating cash flow would have been near a record.”
“Our strategy to shift the mix of business toward faster growing and less volatile consumer-related markets and reduce the cyclical effects of our more mature industrial businesses continued to show positive results during 2009. The Consumer Packaging segment achieved a 30 percent improvement in operating profit, and new product sales, the majority coming from new consumer packaging, grew to a record $179 million,” said DeLoach. “We enter 2010 with a much leaner cost structure, one of the strongest balance sheets in our history and a proven cash-generating business strategy that will allow us to grow our businesses while providing competitive returns to shareholders.”
FIRST QUARTER AND FULL-YEAR 2010 OUTLOOK
Sonoco expects first quarter 2010 base earnings to be in the range of $.40 to $.45 per diluted share. Base earnings in the first quarter of 2009 were $.29 per diluted share. For the full-year 2010, base earnings are currently projected to be between $2.00 to $2.15 per diluted share, an increase over the guidance given on December 4, 2009, of $1.95 to $2.05 per diluted share. The increase is due to an additional reduction in projected pension expenses and slightly stronger business conditions than when the original guidance was issued, partially offset by an expected negative price/cost relationship in the industrial businesses associated with rising OCC prices in advance of selling price increases.
The Company’s earnings guidance for the 2010 first quarter and full year projects lower pension expenses as a result of higher asset levels, from both strong investment performance and the voluntary $100 million contribution. In addition, earnings guidance assumes sales demand will remain near the levels experienced during the second half of 2009, adjusted for seasonality, and that ongoing cost-reduction efforts will be successful. The Company’s 2010 earnings guidance reflects an expected effective tax rate of approximately 31 percent. Although the Company believes the assumptions reflected in the range of guidance are reasonable, it cautions the reader that the outlook, given the global economic environment, remains uncertain.
Segment operating results do not include restructuring and asset impairment charges, interest income and expense, or income taxes. These items are reported under Corporate.
Sonoco’s Consumer Packaging segment includes the following products and services: round and shaped rigid packaging (both composite and plastic); printed flexible packaging; metal and peelable membrane ends and closures; and global brand artwork management.
Fourth quarter 2009 sales for the segment were $421 million, compared with $389 million in the same period in 2008. Segment operating profit was a record $48.8 million in the fourth quarter of 2009, compared with $32.9 million in the same period in 2008.
Sales grew 8 percent during the fourth quarter due to improved volumes for rigid plastic containers and composite cans and the favorable impact of foreign currency translation. In addition, higher selling prices were implemented to offset higher manufacturing and raw materials costs. Operating profit benefited from productivity improvements, a favorable price/cost relationship and improved volume, partially offset by 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, corrugated medium, recovered paper and other recycled materials.
Fourth quarter 2009 sales for the segment were $381 million, compared with $347 million in the same period in 2008. Operating profit for this segment was $23.8 million, compared with $29.2 million in 2008.
The 10 percent increase in segment sales was due to an improvement in volume of international industrial converted products and North American paperboard along with the favorable impact of foreign currency translation. During the fourth quarter of 2008, OCC prices fell significantly immediately after contractual sales price resets, creating a favorable price/cost relationship. This sequence of events was not repeated during the fourth quarter of 2009, causing an unfavorable comparison. This, along with higher pension costs, more than offset the impact of higher volume and productivity improvements, causing a reduction in operating profits.
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 2009 sales for this segment were $125 million, compared with $116 million in the same period in 2008. Segment operating profit was $4.0 million, compared with $4.9 million in 2008.
The 8 percent improvement in sales in this segment was primarily a result of improved volume in the Company’s point-of-purchase display and fulfillment business. However, operating profit declined as higher pension costs and an unfavorable shift in the mix of business were only partially offset by the improved volumes.
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.
Fourth quarter 2009 sales in All Other Sonoco were $75 million, compared with $81 million reported in the same period in 2008. Operating profit for the quarter was $8.4 million in 2009, compared with $8.8 million in 2008.
Sales in All Other Sonoco declined during the quarter due to lower volumes and prices in wire and cable reels and molded plastics. Operating profit in All Other Sonoco declined modestly as lower volume and higher pension costs more than offset productivity improvements and a favorable price/cost relationship.
Net interest expense for the fourth quarter of 2009 declined to $9.5 million, compared with $11.2 million during the same period in 2008. The effective tax rate for the fourth quarter of 2009 was 36.0 percent compared with 19.2 percent for the same period in 2008. The 2008 fourth quarter effective rate was lower due to reductions in uncertain tax liabilities from statute expirations. The fourth quarter of 2009 tax rate includes the effect of a $5.3 million charge related to a change in Mexican tax law. This change had retrospective effect back to 1999, and eliminated the benefits of filing consolidated returns in those periods. The effective tax rate on base earnings for the fourth quarter was 28.7 percent in 2009, compared with 28.6 percent in 2008. For the year, the effective tax rate was 31.2 percent, compared with 27 percent in 2008, while effective tax rate on base earnings was 29.0 percent in 2009, compared with 29.4 percent in 2008.
Founded in 1899, Sonoco is a $3.6 billion global manufacturer of industrial and consumer products and provider of packaging services, with more than 300 operations in 35 countries, serving customers in some 85 nations.