Sonoco Q4 2013 net income attributable to Sonoco up 28% year-over-year to US$54.7M driven by lower-than-expected effective tax rate, improved volume, strong productivity and a positive price/cost relationship; sales up 3.3% to US$1.21B

Elyse Blye

HARTSVILLE, South Carolina , February 13, 2014 (press release) – Sonoco (NYSE: SON), one of the largest diversified global packaging companies, today reported financial results for its fourth quarter and full-year 2013.

Fourth Quarter Highlights

• Fourth quarter 2013 GAAP earnings per diluted share were $.53, compared with $.42 in 2012.
• Fourth quarter 2013 GAAP results include $.05 per diluted share in after-tax charges related primarily to restructuring activities and previously announced plant closures. Fourth quarter 2012 GAAP results included a net after-tax charge of $.14 per diluted share related to restructuring activities and taxes on the repatriation of offshore cash.
• Base net income attributable to Sonoco (base earnings) for fourth quarter 2013 was $.58 per diluted share, compared with $.56 in 2012. (See base earnings definition and reconciliation later in this release.) Sonoco previously provided fourth quarter base earnings guidance of $.55 to $.59 per diluted share.
• Fourth quarter 2013 net sales were $1.22 billion, up 3 percent, compared with $1.18 billion in 2012.
• Cash flow from operations was $117 million, compared with $111 million in 2012. Free cash flow for the fourth quarter was $58 million, compared with $36 million in 2012. (Free cash flow is defined as cash flow from operations minus net capital expenditures and cash dividends. Net capital expenditures is defined as capital expenditures minus proceeds from the disposal of capital assets.)

Full-Year 2013 Highlights

• Full-year 2013 GAAP earnings per diluted share were $2.12, up 11 percent, compared with $1.91 in 2012.
• Full-year 2013 GAAP earnings per diluted share include $.18 per diluted share in after-tax restructuring charges primarily related to plant closures. In comparison, 2012 GAAP results included $.30 per diluted share in after-tax restructuring charges and tax items, partially offset by excess insurance settlement gains.
• Full-year 2013 base earnings were $2.30 per diluted share, up 4 percent, compared with $2.21 in 2012.  Sonoco previously provided full-year guidance of $2.27 to $2.31 per diluted share.
• Net sales reached a record $4.85 billion, compared with $4.79 billion in 2012. 
• Cash flow from operations was a record $538 million, up 33 percent, compared with $404 million in 2012. Free cash flow was $245 million, up 142 percent, compared with $101 million in 2012.    

2014 Base Earnings Guidance Changed; Business Segments to be Modified

• Full-year 2014 base earnings are expected to be $2.43 to $2.53 per diluted share and the Company is targeting $2.51 per diluted share. 
• Base earnings for the first quarter of 2014 are estimated to be $.50 to $.54. Base earnings in the first quarter of 2013 were $.50.
• Free cash flow in 2014 is projected to be approximately $130 million.
• Effective Jan. 1, 2014, due to certain operational and related internal reporting changes, Sonoco Alloyd, a retail packaging business that is currently part of the Company's Protective Solutions segment, will be managed and reported as part of Display and Packaging, the Company's consumer-focused retail merchandising segment. As these changes did not take effect until 2014, Sonoco Alloyd is presented in the Protective Solutions segment as of year-end 2013. 

Fourth Quarter Review

 Commenting on the Company's fourth quarter results, Sonoco President and Chief Executive Officer Jack Sanders said, "Sonoco concluded the final quarter of 2013 with slightly better than expected results compared to the prior year quarter, helped by a lower than expected effective tax rate. That said, the Company did achieve improved volume, particularly in our consumer-focused businesses, along with strong productivity and a positive price/cost relationship. These positive factors were partially offset by higher labor, operating and other costs."

"Operating profits from our Consumer Packaging segment increased 21 percent over the prior year's fourth quarter due to volume gains in most of the businesses in the segment, along with strong productivity and a positive price/cost relationship, partially offset by higher labor and other operating expenses. In addition, operating profits from our Display and Packaging segment improved slightly."

"Fourth quarter operating profits declined 8 percent in our Paper and Industrial Converted Products segment as strong productivity improvements, modest volume growth and insurance proceeds were more than offset by higher labor, maintenance and other operating costs, and an increase in profits deferred on intercompany paper sales. Operating profits in our Protective Solutions segment also declined during the fourth quarter as the benefit of improved productivity was more than offset by a negative price/cost relationship and higher labor and other operating expenses, including costs associated with the start up of new operations."

GAAP net income attributable to Sonoco in the fourth quarter was $54.7 million, or $.53 per diluted share, compared with $42.8 million, or $.42 per diluted share, in 2012. Base earnings in the fourth quarter were $59.9 million, or $.58 per diluted share, compared with $57.1 million, or $.56 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.

Fourth quarter base earnings exclude $.06 per diluted share in after-tax charges related to restructuring activities involving previously announced plant closures offset by $0.01 per diluted share in after-tax gains from insurance settlements. Base earnings in the fourth quarter of 2012 excluded after-tax charges of $.14 per diluted share which included a net income tax charge of $.11 per diluted share largely consisting of tax expense related to the repatriation of accumulated offshore cash and $.04 in after-tax restructuring activities, offset by a $.01 per diluted share gain from insurance settlements and a favorable contingent purchase price adjustment. 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 fourth quarter were $1.22 billion, compared with $1.18 billion in the same period in 2012. This 3 percent improvement was driven by gains in volume and mix from the Company's Consumer Packaging, Paper and Industrial Converted Products and Protective Solutions segments along with higher selling prices. These improvements were partially offset by the previously announced closure of the Company's European recycling operations.

Gross profits were $221 million in the fourth quarter, up 8 percent, compared with $204 million in the same period in 2012. Gross profit as a percent of sales improved to 18.2 percent, compared with 17.3 percent in the same period in 2012. This improvement was due to strong productivity gains, volume growth and a positive price/cost relationship, partially offset by higher maintenance, labor and other costs. The Company's fourth quarter selling, general and administrative expenses increased 14 percent to $127 million due primarily to wage inflation and higher management incentives, compared with the previous year.

Cash generated from operations in the fourth quarter was $117 million, compared with $111 million in the same period in 2012. Operating cash flow increased during the quarter due to higher GAAP net income and beneficial changes in working capital, partially offset by the impact of federal income tax credits associated with the Company's biomass boiler cogeneration project. Fourth quarter reported cash flows from operations were reduced by $17 million for tax-related operating cash flow benefits received in prior quarters that became a reduction of capital expenditures when the federal income tax credits were earned upon the December 2013 completion of the project.  Including this $17 million, total federal tax credits related to the biomass boiler and reported as a reduction of capital expenditures, were $21.9 million. Net capital expenditures and cash dividends were $27 million and $32 million, respectively, during the quarter, compared with $45 million and $30 million, respectively, during the same period in 2012.

2013 Results

Net sales for 2013 were $4.85 billion, up just over 1 percent, compared with $4.79 billion in 2012. Volume growth in the Display and Packaging, Protective Solutions and Paper and Industrial Converted Products segments and higher sales prices, were partially offset by the closure of the Company's European recycling operations, the sale of a small box plant and lower volume in Consumer Packaging.   

Net income attributable to Sonoco for 2013 was $219.1 million, or $2.12 per diluted share, up 12 percent, compared with $196.0 million, or $1.91 per diluted share, in 2012. Earnings in 2013 were negatively impacted by after-tax restructuring and other charges of $18.4 million, or $.18 per diluted share, compared with $30.9 million, or $0.30 per diluted share, in 2012, primarily resulting from restructuring and other charges, net of gains from property sales and insurance recoveries, and income tax charges relating to the repatriation of offshore cash.

Base earnings for 2013 were $237.5 million, or $2.30 per diluted share, compared with $226.9 million, or $2.21 per diluted share, in 2012. This nearly 5 percent improvement stemmed from productivity improvements, modest volume growth and a positive price/cost relationship, partially offset by higher labor, maintenance, pension and other expenses.

Gross profit increased 4 percent to a record $874 million in 2013, compared with $844 million in 2012. Gross profit as a percent of sales was 18.0 percent, compared with 17.6 percent for 2012.

Cash generated from operations in 2013 was a record $538 million, up 33 percent, compared with $404 million in 2012. The improvement in cash flow from operations was due to higher GAAP earnings, lower cash taxes, working capital changes and lower pension and postretirement benefit plan contributions, which were $42 million in 2013, compared with $75 million in 2012. Net capital expenditures and cash dividends were $169 million and $125 million, respectively, during 2013, compared with $183 million and $120 million, respectively, in 2012. Free cash flow was $245 million in 2013, compared with $101 million last year.

As of December 31, 2013, total debt was approximately $981 million, a $392 million reduction from the Company's 2012 year-end total of $1.37 billion. In 2013, the Company repatriated $260 million of accumulated offshore cash, substantially all of which was used to repay outstanding debt. On November 15, 2013, the Company used approximately $121 million of its domestic cash to settle its maturing 6.5 percent bonds including accrued interest.  In addition, the Company had no commercial paper outstanding at the end of 2013, compared with $152 million at December 31, 2012. The Company's debt-to-total capital ratio was 36.3 percent at December 31, 2013, compared with 47.7 percent at the end of 2012. Cash and cash equivalents were $217.6 million at year-end 2013, compared with $373.1 million at year-end 2012.

2013 Overview

According to Sanders, "We delivered on many of our financial, operational, and strategic commitments in 2013, while launching an effort to re-envision Sonoco to achieve future accelerated growth. We delivered record sales, gross profits and cash flow from operations in 2013, while free cash flow more than doubled. Despite an economic recession in Europe, slowing emerging markets and higher pension and other operating costs, Sonoco's base earnings grew nearly 5 percent and we were able to significantly improve our balance sheet by reducing debt along with pension and post-retirement liabilities. Also during the year, we began to strategically align our diversified organization to facilitate the design and delivery of 360-degree Customized Solutions™ to our customers."

"We are optimistic that 2014 will prove to be another good year for Sonoco. While economic conditions in certain emerging markets may prove difficult, we have identified several global growth opportunities. In addition, consumer packaging volumes have been disappointing over the past few years, but we are pleased with recent positive trends and are proactively working to build our technology and new product funnels to drive future organic growth. As we pursue our re-envisioning, we will continue the cultural, structural and operational changes needed to transform Sonoco from a packaging company that just happens to offer solutions to a solutions company that offers more than just packaging. In addition, we will continue to consider and explore other opportunities to further strengthen and differentiate our organization in the marketplace and return value to our shareholders."

Corporate

Net interest expense for the fourth quarter of 2013 decreased to $13.8 million, compared with $14.5 million during the same period in 2012. The decrease was due to lower year-over-year debt levels. The 2013 fourth-quarter effective tax rate on GAAP earnings was 29.1 percent, compared with 44.4 percent in 2012. The effective tax rates on base earnings for the same periods were 27.6 percent and 30.7 percent, respectively.  The 2013 fourth quarter effective rates for both GAAP and base earnings benefited from a greater portion of income being taxed in jurisdictions with relatively favorable tax rates.  The effective rate on GAAP earnings in the fourth quarter of 2012 was significantly higher due to nearly $12 million in additional tax expense associated with the repatriation of offshore cash.    

First Quarter and Full-Year 2014 Outlook

Sonoco expects first quarter 2014 base earnings to be in the range of $.50 to $.54 per diluted share. The Company's first quarter 2013 base earnings were $.50 per diluted share. Annual base earnings per diluted share are expected to be in the range of $2.43 to $2.53 in 2014, and the Company is targeting $2.51 per diluted share. The Company's revised target guidance reflects a net $.21 per share, or 9.1 percent improvement over 2013 base earnings driven by expected modest growth in volume/mix, lower pension expense, productivity improvements and a slightly positive price/cost relationship. Partially offsetting these improvements are expected higher depreciation and other operating costs and a higher effective tax rate. Included in the above guidance is the Company's previously announced plan to repurchase approximately 2 million shares of common stock in 2014, which, if fully implemented, would add approximately $.02 to earnings per diluted share for the year. Free cash flow is expected to be approximately $130 million for 2014 reflecting expectations for higher cash taxes paid, an increase in pension and post retirement plan contributions and higher working capital levels in line with revenue growth.

Although the Company believes the assumptions reflected in the range of guidance are reasonable, given the uncertainty regarding the weather, global economic factors and potential changes in raw material prices and other costs, as well as other risks and uncertainties, including those described below, actual results could vary substantially.

Commenting on the Company's outlook, Sanders said, "While we expect modest year-over-year improvement for the quarter, there is some uncertainty about the negative impact that severe winter weather may have on our operations along with continued difficult economic conditions in Europe and in certain emerging markets. These headwinds, along with the fact that the first quarter is historically our weakest seasonal demand period particularly for our industrial-focused businesses, could get us off to a somewhat slow start. As usual, our plans for 2014 include identifying opportunities to reduce costs and other potential responses to help offset the uncertainties that may affect our business."

Segment Review

Sonoco reports its financial results in four operating segments: Consumer Packaging, Display and Packaging, Paper and Industrial Converted Products, and Protective Solutions. Effective January 1, 2014, Sonoco Alloyd, the Company's retail packaging component and currently part of the Protective Solutions segment, will be reported as part of the Display and Packaging segment. This change reflects the evolving integration occurring between these businesses, enabling them to better leverage the Company's capabilities, products and services to provide complete solutions to our retail merchandising customers. Because these changes did not take effect until 2014, Sonoco Alloyd continues to be presented in the Protective Solutions segment as of December 31, 2013.

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.

Consumer Packaging

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; global brand artwork management; and metal and peelable membrane ends and closures.

Fourth quarter 2013 sales for the segment were $482 million, compared with $464 million in 2012. Segment operating profit was $48.4 million in the fourth quarter, compared with $40.1 million in the same quarter of 2012.

The 4 percent increase in sales was due primarily to a combination of solid volume improvement and a positive mix of business in flexible packaging, composite cans and rigid plastic containers, along with higher sales prices and acquisition of a small graphics management business in the U.K., partially offset by the negative impact of foreign exchange. Segment operating profit increased 21 percent due to volume/mix gains, productivity improvements and a positive price/cost relationship, which were partially offset by higher labor and operating costs.  

Display and Packaging

The Display and Packaging segment includes the following products and services: designing, manufacturing, assembling, packing and distributing temporary, semi-permanent 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.

Fourth quarter 2013 sales for this segment were $132 million, compared with $130 million in 2012. Segment operating profit was $4.7 million in the quarter, compared with $4.5 million in the same quarter of 2012.

Sales were essentially flat during the fourth quarter as volume growth in the U.S. display and packaging business was offset by lower contract packaging volume. Quarterly operating profit for the segment grew slightly year over year on an improved mix of business in U.S. display and packaging activities, which was partially offset by higher labor and other operating costs.

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; wooden, metal and composite wire and cable reels and spools; and recycled paperboard, linerboard, corrugating medium, recovered paper and recycling services for  materials.

Fourth quarter 2013 sales for the segment were $464 million, compared with $448 million in 2012. Segment operating profit was $33.4 million in the fourth quarter, compared with $36.2 million in 2012.

The 3 percent increase in sales was due to higher selling prices, primarily associated with a year-over-year increase in recovered paper costs, and volume and mix gains in North America and Europe, partially offset by the closure of our European recycling operations and the negative impact of foreign exchange. Operating profits declined 8 percent year over year as productivity improvements, business interruption insurance proceeds and volume gains were more than offset by higher maintenance, labor and other costs, and an increase in the amount of profit deferred on intercompany paper sales.

Protective Solutions

The Protective Solutions segment includes the following products: custom-engineered, paperboard-based and expanded foam protective packaging and components; temperature-assurance packaging; and retail packaging.

Fourth quarter 2013 sales were $138 million, compared with $133 million in 2012. Operating profit was $6.8 million, compared with $9.5 million in the fourth quarter of 2012.

This segment's 3 percent increase in sales was due to volume growth in the industrial and consumer protective businesses, offset by the divestiture of a small box plant. Operating profits declined 29 percent as productivity improvements were more than offset by a negative price/cost relationship, higher labor and other operating costs, including the start-up of a plant in Mexico and an unfavorable mix of business in retail packaging.

About Sonoco

Founded in 1899, Sonoco is a global provider of a variety of consumer packaging, industrial products, protective packaging and packaging supply chain services. With annual net sales of approximately $4.9 billion, the Company has 19,900 employees working in 335 operations in 33 countries, serving many of the world's best-known brands in some 85 nations. Sonoco is a proud member of the 2013/2014 Dow Jones Sustainability World Index. For more information on the Company, visit our website at www.sonoco.com.

Definition and Reconciliation of Non-GAAP Financial Measures         
The Company's results determined in accordance with U.S. generally accepted accounting principles (GAAP) are referred to as "as reported" or "GAAP" results. Some of the information presented in this press release reflects the Company's "as reported" or "GAAP" results adjusted to exclude amounts related to restructuring initiatives, asset impairment charges, environmental charges, acquisition costs, excess insurance recoveries, losses from the early extinguishment of debt, and certain other items, if any, the exclusion of which management believes improves comparability and analysis of the underlying financial performance of the business. These adjustments result in the non-GAAP financial measures referred to in this press release as "Base Earnings" and "Base Earnings per Diluted Share."          

These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Sonoco continues to provide all information required by GAAP, but it believes that evaluating its ongoing operating results may not be as useful if an investor or other user is limited to reviewing only GAAP financial measures. Sonoco uses these non-GAAP financial measures for internal planning and forecasting purposes, to evaluate its ongoing operations, and to evaluate the ultimate performance of each business unit against budget all the way up through the evaluation of the Chief Executive Officer's performance by the Board of Directors. In addition, these same non-GAAP measures are used in determining incentive compensation for the entire management team and in providing earnings guidance to the investing community.          

Sonoco management does not, nor does it suggest that investors should, consider these non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Sonoco presents these non-GAAP financial measures to provide users information to evaluate Sonoco's operating results in a manner similar to how management evaluates business performance. Material limitations associated with the use of such measures are that they do not reflect all period costs included in operating expenses and may not reflect financial results that are comparable to financial results of other companies that present similar costs differently. Furthermore, the calculations of these non-GAAP measures are based on subjective determinations of management regarding the nature and classification of events and circumstances that the investor may find material and view differently.           

To compensate for these limitations, management believes that it is useful in understanding and analyzing the results of the business to review both GAAP information which includes all of the items impacting financial results and the non-GAAP measures that exclude certain elements, as described above. Whenever Sonoco uses a non-GAAP financial measure, it provides a reconciliation of the non-GAAP financial measure to the most closely applicable GAAP financial measure. Whenever reviewing a non-GAAP financial measure, investors are encouraged to fully review and consider the related reconciliation as detailed below.         

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