Sonoco's Q1 net income down 25.5% year-over-year to US$42.9M with restructuring, acquisition-related expenses; net sales up 8.5% to US$1.21B primarily due to Tegrant acquisition, higher selling prices
HARTSVILLE, South Carolina
April 19, 2012
– Sonoco (NYSE: SON), one of the largest diversified global packaging companies, today reported financial results for its 2012 first quarter, ending April 1, 2012.
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First Quarter Highlights
Commenting on the Company's first quarter results, Chairman and Chief Executive Officer Harris E. DeLoach, Jr. said, "Overall, our results in the first quarter were good with base earnings per diluted share exceeding the high end of our guidance and consensus First Call estimates. Gross profits increased 12 percent year over year while base earnings before interest and taxes (EBIT) improved by 3 percent. Operating results benefitted during the quarter from much improved productivity and a positive price/cost relationship. Partially offsetting these positive factors were lower volumes, a negative mix of business, higher pension and interest expenses and income taxes.
"Our Consumer Packaging segment's first quarter operating profits were 5 percent higher when compared with the fourth quarter of 2011, but down 2 percent from the first quarter of last year. Year-over-year results were impacted by lower volumes, negative mix and higher pension expenses, partially offset by productivity improvements and a positive price/cost relationship. Operating profits from our Packaging Services segment improved 183 percent from the fourth quarter of 2011, but were down 25 percent from the 2011 first quarter. Year-over-year results were negatively impacted by the previously announced loss of a large contract packaging customer.
"In our Paper and Industrial Converted Products segment, first quarter operating profits were up 10 percent from the fourth quarter and 7 percent from the first quarter of last year. Year-over-year results benefitted from strong productivity and a positive price/cost relationship, partially offset by negative volumes and mix in most of the segment's businesses along with higher pension, labor and other expenses.
"Our new Protective Packaging segment reported its first full quarter results since the acquisition of Tegrant Holding Corporation was completed in November 2011. Operating profits for this segment more than doubled year over year due to the acquisition and improved results from our legacy protective packaging business stemming from productivity improvements and a positive price/cost relationship. We continue to make progress with our integration efforts and are optimistic about achieving our goal of realizing $12 million in annualized synergies by year end."
GAAP net income attributable to Sonoco in the first quarter was $43.1 million, or $.42 per diluted share, compared with $57.4 million, or $.56 per diluted share, in 2011. Base earnings were $53.8 million, or $.52 per diluted share, in the first quarter, compared with $58.6 million, or $.57 per diluted share, in 2011. 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.
Items excluded from base earnings in the first quarter of 2012 totaled $10.8 million, after tax, or $.10 per diluted share. Of this amount, $10.7 million was restructuring expenses and impairment charges coming from previously announced restructuring actions, including the planned closure of an uncoated recycled coreboard mill in Germany and plastic operations in Canada and the United States. Excluded from base earnings in the first quarter of 2011 were after-tax restructuring and other charges totaling $1.1 million. Additional information about base earnings and base earnings per diluted share, along with a reconciliation to the most closely applicable GAAP financial measures, is provided later in this release.
Net sales for the first quarter were $1.21 billion, compared with $1.12 billion in the same period in 2011. This 8.5 percent increase was due primarily to $114 million in sales from the Tegrant acquisition and higher selling prices, partially offset by an $18 million negative impact of foreign currency translation.
Gross profits were $217 million in the first quarter of 2012, compared with $194 million in the same period in 2011. Gross profit as a percent of sales was 17.9 percent, compared with 17.4 percent in the same period in 2011. The improvement in gross profits was due to productivity improvements, a positive price/cost relationship, offset by lower volumes, a negative shift in the mix of business and higher labor and other costs. The Company's selling, general and administrative (SG&A) expenses increased 20 percent year over year in the quarter, primarily due to added costs from the acquired Tegrant businesses. SG&A expenses were 10.1 percent of net sales in the 2012 period, compared with 9.1 percent in 2011.
Cash generated from operations in the first quarter was $101.0 million, compared with a use of cash of $13.8 million in the same period in 2011. First quarter 2012 cash flow reflects pension and postretirement benefit plan contributions of $50 million, compared with $98 million in the first quarter of 2011. Cash flow from operations also improved during the quarter due to a lower use of working capital and less management incentives paid in comparison to the same quarter last year. Capital expenditures and cash dividends were $48 million and $29 million, respectively, during the first quarter of 2012, compared with $38 million and $28 million, respectively, during the first quarter of 2011.
At the end of the first quarter of 2012, total debt was approximately $1.25 billion, a $35 million reduction from the Company's year-end total debt of $1.29 billion. The Company's debt-to-total capital ratio was 45.8 percent, compared with 47.4 percent at year end 2011. Cash and cash equivalents as of the end of the first quarter were $176 million, substantially unchanged from year end 2011.
Net interest expense for the first quarter of 2012 increased to $15.4 million, compared with $8.7 million during the same period in 2011. The increase was due to higher debt levels as a result of the acquisition of Tegrant. The effective tax rate for the first quarter of 2012 was 34.5 percent, compared with 31.1 percent for the same period in 2011, reflecting a higher percentage of the Company's income before taxes being generated in higher tax jurisdictions. The effective tax rate on base earnings was 33.7 percent and 31.2 percent in the first quarters of 2012 and 2011, respectively.
Second Quarter and Full-Year 2012 Outlook
Sonoco expects second quarter 2012 base earnings to be in the range of $.55 to $.60 per diluted share. Base earnings in the second quarter of 2011 were $.60 per diluted share. For the full-year 2012, base earnings are projected to be in the range of $2.34 to $2.44 per diluted share. The Company had previously provided full-year guidance of $2.32 to $2.42 per diluted share.
The Company's base earnings guidance assumes sales demand will remain near current levels, adjusted for seasonality. Although the Company believes the assumptions reflected in the range of guidance are reasonable, given the volatility of raw material prices and other costs, as well as uncertainty regarding the global economy, actual results could vary substantially.
Commenting on the Company's outlook, DeLoach said, "While we were encouraged by the better- than- expected first quarter performance, we remain cautious about the remainder of 2012 as our customers continue to schedule orders based on known demand due to economic uncertainty. We were extremely pleased with the return of productivity improvements to more historical levels and with the sequential improvement in industrial-related volumes. However, our long-term visibility into customer volumes remains uncertain and we remain focused on minimizing downtime in our paper mills and further reducing our cost structure through proactive operating excellence initiatives and necessary restructuring actions."
The Company reports its financial results in four operating segments, including Consumer Packaging, Paper and Industrial Converted Products, Packaging Services and Protective Packaging. Segment operating results do not include restructuring and asset impairment charges, acquisition expenses, interest income and expense, income taxes or certain other items, if any, the exclusion of which the Company believes improves comparability and analysis.
Sonoco's Consumer Packaging segment includes the following products and services: round and shaped rigid containers and trays (both composite and thermoformed plastic); blow-molded plastic bottles and jars; extruded and injection-molded plastic products; printed flexible packaging; metal and peelable membrane ends and closures; and global brand artwork management.
First quarter 2012 sales for the segment were $496 million, compared with $485 million in the fourth quarter of 2011 and $498 million in first quarter of 2011. Segment operating profit was $50.1 million in the first quarter, compared with $47.8 million in the fourth quarter of 2011 and $51.2 million in last year's first quarter.
Year-over-year sales were slightly lower as the divestiture of the Company's Brazilian injection molding business, lower volumes and the unfavorable impact of foreign currency translation more than offset higher selling prices. Operating profits were also slightly lower in the quarter due to negative volume and mix and higher pension, labor and other expenses. These negative factors were partially offset by productivity improvements and a positive price/cost relationship.
Paper and Industrial Converted Products
The Paper and Industrial Converted Products segment includes the following products: high-performance paper and composite paperboard tubes and cores; fiber-based construction tubes and forms; wooden, metal and composite wire and cable reels and spools; and recycled paperboard, linerboard, corrugating medium, recovered paper and other recycled materials.
First quarter 2012 sales for the segment were $464 million, compared with $452 million in the fourth quarter of 2011 and $471 million in the first quarter of 2011. Segment operating profit improved to $32.3 million in the first quarter, compared with $29.4 million in the fourth quarter of 2011 and $30.3 million in the first quarter of 2011.
The 2 percent year-over-year reduction in first quarter sales was due to lower selling prices primarily due to lower recovered paper prices in the Company's recycling operations, a negative mix of business and the negative impact of foreign currency translation. Operating profits improved by 7 percent year over year due to a significant improvement in productivity and a positive price/cost relationship. These positive factors were partially offset by negative volume and mix and higher pension, labor and other costs.
The Packaging Services segment includes the following products and services: designing, manufacturing, assembling, packing and distributing temporary, semipermanent and permanent point-of-purchase displays; supply chain management services, including contract packing, fulfillment and scalable service centers; and paper amenities, such as coasters and glass covers.
First quarter 2012 sales for this segment were $115 million, compared with $109 million in the fourth quarter of 2011 and $123 million in first quarter of 2011. Segment operating profit was $4.8 million in the quarter, compared with $1.7 million in the fourth quarter of 2011 and $6.5 million in the first quarter of 2011.
Sales were slightly lower than last year's first quarter as an improvement in global fulfillment activities was offset by the previously disclosed loss of a contract packaging customer and the negative impact of foreign currency translation. Operating profit for the segment declined year over year due primarily to lower volumes associated with the lost contract packaging customer. This loss of business was partially offset by increased retail merchandising and fulfillment business.
The Protective Packaging segment includes the following products: custom-designed paperboard-based and expanded foam protective packaging; temperature-assurance packaging; and retail security packaging.
First quarter 2012 sales were $138 million, compared with $84 million in the fourth quarter of 2011 and $24 million in the first quarter of 2011. Operating profit for the current quarter was $7.0 million, compared with$5.2 million in the fourth quarter of 2011 and $3.2 million in first quarter of 2011.
The significant sales growth year over year in this segment was due to the Tegrant acquisition. Sales from the Company's legacy protective packaging business were essentially flat year over year. Operating profits more than doubled year over year due to the Tegrant acquisition and productivity improvements and a positive price/cost relationship in the Company's legacy business.
Conference Call Webcast
Sonoco will host its regular quarterly conference call Thursday, April 19, 2012, at 11 a.m. Eastern time, to review its first quarter 2012 financial results. The live conference call can be accessed in a "listen only" mode via the Internet at http://www.sonoco.com, under the Investor Relations section. A telephonic replay of the call will be available starting at 2 p.m. Eastern time to U.S. callers at 888-286-8010 and international callers at +617-801-6888. The replay passcode for both U.S. and international calls is 38812653. The archived call will be available through April 29, 2012. The webcast call also will be archived in the Investor Relations section of Sonoco's website.
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 $4.5 billion, the Company has more than 19,600 employees working in 349 operations in 34 countries, serving some of the world's best known brands in some 85 nations. Sonoco is a proud member of the 2011/2012 Dow Jones Sustainability World Index. For more information on the Company, visit our website at http://www.sonoco.com.
References to our Website Address
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Industry Intelligence editor's note: In an omitted table, Sonoco reported Q1 net income of US$42.9 million. For the same period a year ago, the company recorded net income of US$57.6 million.