Sonoco Products Company — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing is an annual report, not a standalone fourth-quarter filing. Sonoco manufactures consumer, industrial and protective packaging and provides packaging services through four reportable segments, with 336 locations in 34 countries.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $5.015 billion | $4.848 billion |
| Gross profit / margin | $921.3 million / 18.4% | $873.5 million / 18.0% |
| Income before interest and taxes (GAAP) | $391.5 million | $361.3 million |
| Net income attributable to Sonoco | $239.2 million | $219.1 million |
| Diluted EPS | $2.32 | $2.12 |
| Base diluted EPS (non-GAAP) | $2.54 | $2.30 |
| Cash from operations | $417.9 million | $538.0 million |
| Capital spending | $177.1 million | $172.4 million |
| Total debt / cash and cash equivalents | $1.253 billion / $161.2 million | $981.5 million / $217.6 million |
| Current ratio / debt to total capital | 1.54 / 45.1% | 1.59 / 36.3% |
Sales increased 3.4%, with reported growth contributions of $98 million from volume/mix, $27 million from selling prices and $100 million from acquisitions/divestitures, partly offset by $59 million from currency exchange and other. Management attributed improved earnings and gross margin to productivity, positive price/cost, volume growth, acquisitions and lower pension expense. Base measures are non-GAAP and exclude specified items; they are not substitutes for GAAP results.
Cash from operations fell $120.1 million, reflecting working-capital movements, higher pension contributions and taxes, and Fox River settlement funding. Net working capital was $484.8 million. The company paid $1.27 per share in dividends and repurchased $87.8 million of shares during 2014.
Fourth-quarter snapshot
Unaudited Q4 net sales were $1.318 billion, versus $1.215 billion in Q4 2013. Net income attributable to Sonoco was $54.5 million, compared with $54.7 million, and diluted EPS was $0.53 in both quarters. Q4 restructuring and asset impairment charges were $11.2 million, compared with $6.3 million a year earlier.
Material changes and business developments
- Completed the Weidenhammer Packaging Group acquisition on October 31, 2014, for approximately $355.3 million of total consideration, including $323.2 million cash and assumed debt and other liabilities. It added 13 facilities and approximately 1,100 employees; integration and final purchase-price allocation remained underway.
- Acquired Dalton Paper Products for net cash of $11.3 million. Total 2014 acquisition cash costs were $334.1 million.
- Total debt rose $271.7 million, primarily due to the $250 million three-year term loan used partly to fund Weidenhammer. A $350 million revolving credit facility is committed through October 2019; no commercial paper was outstanding at year-end.
- Segment operating profits rose in Consumer Packaging, Display and Packaging, and Paper and Industrial Converted Products, but declined 15.2% in Protective Solutions to $34.0 million.
- Defined benefit and postretirement plans were underfunded by approximately $454 million at year-end, up from $270 million. The increase was driven mainly by lower discount rates and updated mortality assumptions.
Outlook, risks and contingencies
- For 2015, management expected approximately 2% volume growth excluding acquisitions, gross profit and base EBIT margins broadly in line with 2014, and operating cash flow of approximately $500 million. It forecast about $220 million of capital spending and a 32% base effective tax rate.
- Weidenhammer was expected to contribute approximately $0.09 of incremental diluted EPS in 2015. Management expected $13 million higher pension and postretirement expense, partly offset by productivity and lower projected resin, film, energy and freight costs.
- Management planned staged organizational and support-structure changes during 2015 and potentially into 2016, targeting annualized cost reductions of $25 million to $30 million; implementation and severance costs were expected.
- Management cautioned that a stronger U.S. dollar could pressure reported earnings. Other key exposures include raw-material, energy and freight costs; the ability to pass costs through; economic and competitive conditions; customer concentration; international and currency risks; and pension funding and goodwill impairment assumptions.
- Environmental reserves totaled $59.3 million at year-end, including $37.8 million for Fox River matters. A proposed $14.7 million settlement was court-approved in February 2015 but was expected to be appealed; the company said additional exposure beyond reserves was uncertain. A separate Rockton, Illinois proceeding sought penalties related to a closed plant remediation.
- Restructuring and asset impairment charges were $22.8 million in 2014. The company expected approximately $1.1 million of additional costs for previously announced actions, primarily by the end of 2015. Goodwill impairment testing found no impairment in 2014, but several reporting units were identified as more exposed if results fall short of projections.
Important facts for investors to verify
- Track the realization of Weidenhammer’s expected earnings contribution, integration progress and final purchase-price allocation.
- Compare 2015 cash flow, margins and volume with management’s outlook, including the effects of currency and input-cost movements.
- Monitor debt, liquidity and pension funding as well as the impact of the term loan and future benefit-plan assumptions.
- Follow appeals and developments in the Fox River settlement, the remaining environmental reserve and the Rockton cases.
- Assess the underlying trend in GAAP earnings alongside base/non-GAAP results and recurring restructuring, acquisition and impairment charges.