Sonoco Products Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 30, 2014; compared with the three months ended March 31, 2013. Sonoco provides consumer packaging, industrial products, protective packaging, and packaging supply-chain services through four reportable segments. Interim financial statements are unaudited and were reviewed, but not audited, by the independent accountant.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $1,185.6 million | $1,179.2 million |
| Gross profit / margin | $212.3 million / 17.9% | $205.7 million / 17.4% |
| Income before interest and taxes | $86.6 million | $81.4 million |
| Net income attributable to Sonoco | $52.3 million | $48.1 million |
| Diluted EPS | $0.50 | $0.47 |
| Operating cash flow | $45.5 million | $136.3 million |
| Capital expenditures | $37.7 million | $55.5 million |
Sales increased 0.5%; management attributed the increase principally to higher selling prices, with volume/mix up $4 million and foreign-currency translation and other effects reducing sales by $10 million. GAAP diluted EPS rose from $0.47 to $0.50. Management’s non-GAAP “base” diluted EPS was $0.52 versus $0.50; base results exclude restructuring/impairment and other specified items.
Cash from operations fell $90.9 million year over year, reflecting, among other factors, higher pension contributions, a larger receivables increase, and less cash provided by payables and income-tax items. Operating cash flow less capital expenditures was approximately $7.7 million, versus $80.8 million a year earlier.
Financial position and segments
At March 30, 2014, cash was $191.4 million, total debt outstanding was $985.4 million, and reported total assets were $4.0 billion. Long-term debt, net of current portion, was $946.5 million. No commercial paper was outstanding; the company had a $350 million commercial-paper program supported by a committed bank facility through October 2017. Management stated that covenant measures were substantially above required minimums. Cash dividends paid were $31.7 million, or $0.31 per share.
- Consumer Packaging: Sales rose 0.4%; segment operating profit increased 13.8% to $48.2 million.
- Display and Packaging: Sales rose 5.8%; segment operating profit increased 52.9% to $5.4 million.
- Paper and Industrial Converted Products: Sales rose 0.3%; operating profit declined 4.0% to $29.8 million.
- Protective Solutions: Sales declined 4.3%; operating profit declined 45.6% to $5.3 million.
Effective January 1, 2014, Sonoco Alloyd was moved from Protective Solutions to Display and Packaging; prior-period segment results were retrospectively revised.
Changes, outlook, and risks
- Severe winter weather disrupted customer and company operations in January and February, causing lost production and sales and higher costs, particularly in industrial-related businesses. March demand rebounded before returning to a more normal order level.
- Management cited improved price/cost, lower pension expense, and productivity as benefits to margins, partly offset by higher maintenance, labor, and other costs. Net interest expense declined to $12.6 million from $14.3 million, primarily following repayment of 6.5% debentures that matured in November 2013.
- No specific full-year earnings or EPS guidance is provided in the supplied filing text. Management expected approximately $150 million of capital spending during the remainder of 2014, approximately $22 million of additional pension and postretirement contributions, and repurchases of about 1.8 million additional shares under the buyback program.
- About $2.5 million of additional charges were expected for announced restructuring actions, with most expected to be incurred and paid by year-end 2014; approximately $1.0 million of future pretax charges was also expected for 2012-and-earlier actions. Further restructuring remained possible.
- Environmental exposures include Fox River reserves of $48.9 million for potential liabilities beyond the specific cleanup-site reserve of $3.2 million. A proposed settlement remained conditional on public comment and court approval, and timing, outcome, and financial impact were uncertain. Sonoco stated that additional consolidated exposure beyond recorded reserves was believed limited to U.S. Mills’ equity of approximately $94 million; actual remediation costs and allocation could differ.
- Goodwill impairment risks identified by management included Plastics–Blowmolding, which had short-term performance issues, and Display and Packaging, where a large portion of sales was concentrated in one customer whose business would be negotiated over the next few years. No impairment-triggering event was identified through March 30.
- Foreign exchange, commodity prices, pension assumptions, customer demand, cost and productivity execution, and legal and environmental outcomes are among the stated risks. A shift to alternative Venezuelan exchange rates could produce an estimated translation loss of approximately $3 million or $6 million, depending on the rate used, and could also lead to asset impairment.
Important facts for investors to verify
- Whether the operating-cash-flow decline and working-capital movements reverse in subsequent quarters.
- Whether the weak Protective Solutions and Paper and Industrial Converted Products results improve, and whether Blowmolding sustains the improvements assumed in goodwill assessments.
- Progress and final financial terms of the Fox River settlement, court proceedings, and any change in environmental reserves or exposure.
- Execution of the stated capital-spending, pension-contribution, restructuring, and share-repurchase expectations.
- Customer retention and renewal outcomes in Display and Packaging, given the disclosed sales concentration.