Sonoco Reports First Quarter 2013 Earnings
April 18, 2013 - Sonoco today reported financial results for its first quarter that ended March 31, 2013.
First Quarter Review
Commenting on the Company's first quarter results, Sonoco President and Chief Executive Officer Jack Sanders , said, "While base earnings for the first quarter were within our guidance, they were off 4 percent from 2012 due to challenging economic conditions and some operating inefficiencies. Base earnings were negatively impacted by lower volume and higher maintenance, labor, pension and other expenses. Productivity improvements, which were below our historical average, and a slightly positive price/cost relationship only partially offset these negative factors."
"Operating profits from our Paper and Industrial Converted Products segment declined 4 percent in the first quarter. Negative factors contributing to the decline included higher than anticipated maintenance, labor and other expenses associated with paper mill repair outages and lower volume. These factors were partially offset by a positive price/cost relationship and modest productivity gains."
"Our Protective Solutions segment reported a 22 percent improvement in operating profits during the first quarter due primarily to synergies and productivity improvements. Improved volume in the segment's molded foam and temperature-assurance businesses was more than offset by lower retail security business."
"Operating profits in our Consumer Packaging segment declined 15 percent during the quarter as we continued to experience weakness in many packaged food categories, which was partially responsible for driving volumes lower in nearly all of our packaging businesses. In addition, we recognized a negative LIFO inventory adjustment and experienced a negative price/cost relationship stemming from higher resin and other raw material costs. These negative factors were only partially offset by modest productivity improvements. Operating profits from our Display and Packaging segment were essentially flat for the quarter as slightly positive volume and a positive price/cost relationship were offset by higher costs."
GAAP net income attributable to Sonoco in the first quarter was $48.1 million , or $.47 per diluted share, compared with $43.1 million , or $.42 per diluted share, in 2012. Base earnings were $51.7 million , or $.50 per diluted share, in the first quarter, compared with $53.8 million , or $.52 per diluted share, in 2012. Base earnings and base earnings per diluted share are non-GAAP financial measures adjusted to remove restructuring charges, asset impairment charges, acquisition expenses and other items, if any, the exclusion of which the Company believes improves comparability and analysis of the underlying financial performance of the business.
First quarter base earnings excluded after-tax charges of $3.6 million , or $.03 per diluted share, stemming from previously announced restructuring activities and the impact of a currency devaluation in Venezuela . Items excluded from base earnings in the 2012 first quarter totaled $10.8 million , after tax, or $.10 per diluted share, for restructuring expenses and impairment charges, including the closure of a paper mill in Germany and plastics operations in Canada and the United States . Additional information about base earnings and base earnings per diluted share, along with reconciliation to the most closely applicable GAAP financial measures, is provided later in this release.
Net sales for the first quarter were $1.18 billion , compared with $1.21 billion in the same period in 2012. This 3 percent decline was driven by lower volume and selling prices in both Consumer Packaging and, to a somewhat lesser extent, Paper and Industrial Converted Products. These declines were partially offset by volume improvement and sales price gains in the Company's Display and Packaging and Protective Solutions segments.
Gross profits were $206 million in the first quarter of 2013, compared with $217 million in the same period in 2012. Gross profit as a percent of sales was 17.4 percent, compared with 17.9 percent in the same period in 2012. The decline in total gross profits was due to lower volume, a negative LIFO inventory adjustment, and higher maintenance, labor and other costs, partially offset by productivity improvements. The Company's first quarter selling, general and administrative expenses declined 2 percent to $120 million , but remained flat as a percentage of sales due to lower revenues.
Cash generated from operations in the first quarter was $136.3 million , up 40 percent, compared with $97.5 million in the same period in 2012. Operating cash flow increased during the quarter due largely to lower pension and other benefit plan contributions and changes in working capital. Capital expenditures, net of proceeds, and cash dividends were $55 million and $30 million , respectively, compared with $43 million and $29 million , respectively, during the same period in 2012. Cash and cash equivalents as of the end of the first quarter were $163.5 million , compared with $373.1 million at year-end 2012.
At the end of the first quarter of 2013, total debt was approximately $1.11 billion , a $258 million reduction from the Company's year-end total of $1.37 billion . During the first quarter, the Company received $254 million of repatriated accumulated offshore cash, $135 million of which was used to pay off a term loan issued in November 2011 . The remainder was used to pay down commercial paper and/or fund the normal cash needs of the Company. Commercial paper outstanding was $23 million at the end of the quarter compared with $152 million at December 31, 2012 . The Company's debt-to-total capital ratio was 42.3 percent at end of the first quarter, compared with 47.7 percent at the end of 2012.
Net interest expense for the first quarter of 2013 decreased to $14.3 million , compared with $15.4 million during the same period in 2012. The decrease was due to lower year-over-year debt levels. The effective tax rate on both GAAP and base earnings for the first quarter of 2013 was 31.6 percent, compared with 34.5 percent and 33.7 percent, respectively, for the same period in 2012. In each case, the lower rate is largely attributable to year-over-year changes in the accrual for uncertain tax positions. The current quarter's effective rate on base earnings is somewhat lower than what is expected for the year as a whole due to discrete items included in the current period.
Second Quarter and Full-Year 2013 Outlook
Sonoco expects second quarter 2013 base earnings to be in the range of $.56 to $.60 per diluted share. The Company's second quarter 2012 base earnings were $.58 per diluted share. Annual base earnings per diluted share are expected to be in the range of $2.26 to $2.32 . Projections for free cash flow are raised to approximately $150 million , compared with previous guidance of $130 million in anticipation of a federal incentive related to the Hartsville biomass boiler project. The Company's base earnings guidance assumes modest volume growth, productivity improvements and a slightly positive price/cost relationship. Partially offsetting these improvements are several negative items, including higher year-over-year pension expenses. Although the Company believes the assumptions reflected in the range of guidance are reasonable, given the uncertainty regarding the global economy and fluctuating raw material prices and other costs, actual results could vary substantially.
Commenting on the Company's outlook, Sanders said, "We expect a steadily improving operating environment in the second quarter and remainder of 2013. One-time operational issues have been addressed and we are focused on quickly commercializing recently won business. In addition, we expect to begin benefiting from announced price increases in our Industrial, Consumer Packaging and Protective Solutions businesses to offset higher operating and raw material costs. Finally, we will continue to aggressively implement contingency plans focused on reducing costs in all of our businesses to further improve margins and free cash flow."
Founded in 1899, Sonoco is a global provider of a variety of consumer packaging, industrial products, protective packaging and packaging supply chain services. With annualized net sales of approximately $4.8 billion , the Company has 19,900 employees working in 347 operations in 34 countries, serving many of the world's best-known brands in some 85 nations. Sonoco is a proud member of the 2012/2013 Dow Jones Sustainability World Index. For more information on the Company, visit our website at www.sonoco.com.