Sonoco (NYSE: SON) reported preliminary operating results for the second quarter and year-to-date periods ending June 28, 2015. The Company expects to release complete consolidated financial results with the filing of its Form 10-Q in August.

Review of Mexico Packaging Center Historical Financial Results

Sonoco, working with outside accounting and legal consultants, is currently conducting a thorough review of financial results for a single contract packaging center in Mexico due to the discovery of overstatements to prior periods’ earnings. This packaging center is part of the Display and Packaging segment. The Company expects this review to result in changes to the Company’s historical consolidated financial statements dating back to first quarter 2012. Operating results reported in this release for the 2015 second quarter and year-to-date periods reflect the review’s preliminary findings made to date, including a $3.0 million reduction to previously reported first quarter 2015 net income. Based on the work done to date, the Company currently expects adjustments resulting in a cumulative reduction to its pre-tax earnings of approximately $30 million for the three years ending December 31, 2014. No adjustments to operating or other cash flows are currently expected to be required. The Company’s review includes an evaluation of the impacts on previously reported financial statements as well as any related internal control implications. Because the review is ongoing, the amounts disclosed and any expectations mentioned are subject to change. The Company hopes its review will be completed in the next several weeks. Final findings will be fully reflected in the Company’s second quarter 10-Q and its corrected historical financial statements, the filings for which are expected to occur in August 2015.

The independent Audit Committee of Sonoco’s Board of Directors has retained the international legal firm of Ropes & Gray to advise it during this internal financial review.

Note that, without excluding the possibility of other changes, the results reported in this release referred to as “estimated” reflect those items management believes are subject to change due to the ongoing Mexico packaging center review.

Preliminary Second Quarter Highlights

• Second quarter 2015 GAAP earnings per diluted share are estimated to be $.61. (The Street is at $0.67.) Second quarter 2015 GAAP results include $.07 per diluted share in after-tax charges related to plant consolidations, global restructuring activities and other costs. This was partially offset by approximately $.02 per diluted share in after-tax gains associated with a reversal of reserves and tax adjustments, partially offset by acquisition costs.
• Base net income attributable to Sonoco (base earnings) for second quarter 2015 is estimated to be $.66 per diluted share. (See base earnings definition and reconciliation later in this release.) Sonoco previously provided second quarter base earnings guidance of $.64 to $.69 per diluted share.
• Second quarter 2015 net sales are estimated to be $1.25 billion.
• Cash flow from operations was $115 million. Free cash flow for the second quarter was $35 million. (See free cash flow definition later in this release.)

2015 Guidance Updated

• Base earnings are expected to be in the range of $.65 to $.70 per diluted share for the third quarter. The Company has updated full-year 2015 guidance to $2.48 to $2.58 per diluted share, which is lower than previous guidance due to the above mentioned issue in Mexico along with higher than expected pension expense, a delay in achieving certain acquisition synergies and changing market conditions. The Company’s previous guidance for the year was $2.60 to $2.70 per diluted share.
• Free cash flow in 2015 remains unchanged at approximately $140 million.

*** The Street sees FY15 EPS of $2.64.

Preliminary Second Quarter ResultsGAAP net income attributable to Sonoco in the second quarter is estimated to be $62.8 million, or $.61 per diluted share. Base earnings in the second quarter are estimated to be $67.9 million, or $.66 per diluted share. 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. 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 and will be provided in the Company’s 10-Q filing.

Second quarter base earnings exclude $6.7 million in after-tax charges, or $.07 per diluted share, related to global plant consolidations, restructuring activities and other costs. This is partially offset by approximately $.02 per diluted share in after-tax gains associated with a reversal of Fox River litigation reserves and an adjustment of tax reserves, partially offset by acquisition costs.

Net sales for the second quarter are estimated to be $1.25 billion. Acquisitions contributed $73 million to sales in the quarter, while foreign exchange rate changes and divestitures had the effect of reducing reported sales by $76 million. Volume sales growth, primarily in the Consumer Packaging and Protective Solutions segments, more than offset slightly lower volume in industrial-focused businesses.

Gross profit is estimated to be $241 million in the second quarter and gross profit as a percent of sales is estimated to be a better-than-expected 19.3 percent. The Company’s second quarter selling, general and administrative expenses are estimated to be $133 million or 10.6 percent of sales.

Cash generated from operations in the second quarter was estimated to be $115 million. Net capital expenditures and cash dividends were $45 million and $35 million, respectively, during the quarter. (Net capital expenditures is defined as capital expenditures minus proceeds from the disposal of capital assets.) As a result, free cash flow for the quarter was estimated to be $35 million. (Free cash flow is defined as cash flow from operations minus net capital expenditures and cash dividends.)

Net interest expense for the second quarter of 2015 increased to $13.6 million. The 2015 second quarter effective tax rate on GAAP and base earnings is estimated to be 28.6 percent and 32.3 percent, respectively.

Preliminary Year-to-date ResultsFor the first six months of 2015, net sales are estimated to be $2.46 billion. Acquisitions added $145 million, while a negative effect of foreign exchange rate changes and divestitures reduced sales by $133 million.

Net income attributable to Sonoco for the first six months of 2015 is estimated to be $147.7 million, or $1.44 per diluted share. Earnings in the first half of 2015 benefitted from after-tax gains of $21.1 million, or $.20 per diluted share, from the reversal of reserves related to the Fox River environmental litigation; and $16.8 million, or $.16 per diluted share, from the sale of two metal ends and closures plants; and $.03 from the reversal of tax reserves. These positive items were partially offset by $15.6 million, or $.15 per diluted share, in after-tax charges related to plant consolidations, global restructuring activities, and acquisition and other costs. As a result, base earnings for the first half of 2015 are estimated to be $122.0 million, or $1.19 per diluted share.

Gross profit is estimated to be $461 million for the first half of 2015. Gross profit as a percent of sales is estimated to be 18.8 percent.

For the first six months of 2015, cash generated from operations was estimated to be $173 million. Net capital expenditures and cash dividends are estimated to be $85 million and $67 million, respectively, during the first half of 2015. Free cash flow for the first half of 2015 was estimated to be $21 million. The Company spent approximately $16 million in the second quarter to purchase a majority interest in Graffo Paranaense de Embalagens S/A (Graffo), a closely held flexible packaging business in Brazil.

At June 28, 2015, total debt was approximately $1.3 billion, compared with $1.3 billion at December 31, 2014. Cash and cash equivalents were $220 million at June 28, 2015.

Third Quarter and Full-Year 2015 Earnings Guidance UpdateSonoco expects third quarter 2015 base earnings to be in the range of $.65 to $.70 per diluted share. Annual 2015 base earnings guidance has been changed to a range of $2.48 to $2.58 per diluted share, compared to previous guidance of $2.60 to $2.70. The Company’s 2015 guidance reflects an expectation of a 32 percent effective tax rate for the year. Free cash flow is expected to be approximately $140 million in 2015, unchanged from previous estimates.

Although the Company believes the assumptions reflected in the range of guidance are reasonable, given uncertainty regarding the future performance of the overall economy 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, Jack Sanders, Sonoco president and CEO, said, “Entering the second half of 2015, we remain optimistic that global economies will continue to improve. Unfortunately, we face some short-term obstacles which are requiring us to lower our guidance for the rest of 2015. First, we will work to resolve issues associated with the contract packaging operation in Mexico. In addition, the revised outlook reflects higher than previously expected pension expense and a delay in realizing expected synergies from our integration of Weidenhammer due to a supplier dispute and a seven-month-long review by the U.K.’s Competition Market Authority, which finally cleared the transaction on July 3, 2015. Lastly, our paper operations are facing challenging markets, and rising raw material prices in North America and Europe could impact our tubes and cores business. To offset some of these headwinds, we are making significant progress in streamlining our corporate and business unit structures to reduce costs, and expect to drive continued manufacturing productivity improvements and organic sales growth.”

Segment ResultsSonoco reports its financial results in four operating segments: Consumer Packaging, Paper and Industrial Converted Products, Protective Solutions and Display and 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.

Consumer PackagingSonoco’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.

Second quarter 2015 sales for the segment were $531 million, compared with $474 million in the second quarter of 2014. Segment operating profit was $56.8 million in the second quarter, compared with $42.8 million in the same quarter of 2014.

According to Sanders, “Segment sales grew 12 percent during the quarter due to the Weidenhammer and Graffo acquisitions and volume growth in global composite cans, flexible packaging and rigid plastic containers. Foreign exchange rate changes and the divestiture of two metal ends and closures plants had the effect of reducing sales in the quarter by $23 million.

“Consumer Packaging operating profit grew $14 million or 33 percent and reached another quarterly record due to strong productivity, a positive price/cost relationship, the accretive benefit of acquisitions and improved volume. These favorable results more than offset higher labor, pension, maintenance and other operating costs.”

Paper and Industrial Converted ProductsThe Paper and Industrial Converted Products segment includes the following products: 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 material recycling services.

Second quarter 2015 sales for the segment were $449 million, down from $490 million in 2014. Segment operating profit was $38.1 million in the second quarter of 2015, compared with $46.5 million in 2014.

Sanders commented, “Paper and Industrial Converted Products segment sales declined 8 percent during the quarter due to the negative impact of foreign exchange translation and lower volume in most of our global industrial-related businesses. Segment earnings declined $8.4 million, or 18 percent, in the quarter as lower volume globally along with higher labor, pension and other operating expenses, negated a positive price/cost relationship and modest manufacturing productivity improvements.”

Protective SolutionsThe Protective Solutions segment includes the following products: custom-engineered, paperboard-based and expanded foam protective packaging and components, and temperature-assured packaging.

Second quarter 2015 sales were $127 million, compared with $121 million in the same period in 2014. Operating profit was $13.4 million, compared with $9.6 million in the same quarter of 2014.

“We were very pleased with the record results in our Protective Solutions segment as operating profit rose $3.8 million or 39 percent in the quarter as a positive price/cost relationship, solid volume growth and productivity improvements more than offset higher labor, maintenance and other operating costs,” Sanders said. “Segment sales grew nearly 5 percent due to volume growth in temperature-assured packaging, automotive components and our paper-based protective packaging.”

Display and PackagingThe 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; retail packaging, including printed backer cards, thermoformed blisters and heat sealing equipment; and paper amenities, such as coasters and glass covers.

Estimated second quarter 2015 sales for this segment are $142 million. Estimated segment operating profit is $1.2 million for the quarter. Excluding the impact of the previously described issue in Mexico, results in the segment were slightly behind management expectations due partially to the delay of some domestic promotional activity.

Conference Call WebcastManagement will host a conference call and webcast to further discuss these results beginning at 11 a.m. ET today. The live conference call and a corresponding presentation can be accessed via the Internet at www.sonoco.com, under the Investor Relations section, or at http://investor.sonoco.com. A telephonic replay of the call will be available starting at 4 p.m. ET, to U.S. callers at 855-859-2056 and international callers at +404-537-3406. The replay passcode for both U.S. and international calls is 80286721. The archived call will be available through July 26, 2015. The webcast call also will be archived in the Investor Relations section of Sonoco’s website.