Sonoco Products Company — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 29, 2013; comparisons are to the periods ended September 30, 2012. Amounts are U.S. dollars. Interim statements are unaudited and were reviewed, not audited.
Business context and results
Sonoco is a global packaging and packaging-services company, reporting in Consumer Packaging, Paper and Industrial Converted Products, Display and Packaging, and Protective Solutions.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $1,227.7 million | $1,195.5 million | $3,633.2 million | $3,610.3 million |
| Gross profit | $224.0 million | $206.2 million | $652.3 million | $639.6 million |
| Income before interest and taxes | $100.3 million | $96.3 million | $273.7 million | $263.8 million |
| Net income attributable to Sonoco | $61.2 million | $58.8 million | $164.4 million | $153.2 million |
| Diluted EPS, GAAP | $0.59 | $0.57 | $1.59 | $1.49 |
| Diluted EPS, company-defined base | $0.63 | $0.55 | $1.72 | $1.65 |
Q3 gross margin improved to 18.25% from 17.25%. For the first nine months, base earnings rose 4.6%; the filing attributes improvement to productivity, modestly favorable price/cost, slightly higher volume, lower net interest expense, and a lower base tax rate. Base measures exclude specified restructuring, impairment, and other items and are not GAAP measures.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $421.3 million, versus $292.5 million; capital spending was $143.9 million. Cash and cash equivalents fell to $287.6 million from $373.1 million at year-end 2012.
- Total debt was approximately $1,099.6 million at September 29, down from approximately $1,373.1 million at year-end. The company reported $272.3 million of net debt repayments during the nine months, funded in part by repatriating approximately $260 million of offshore cash.
- Commercial paper outstanding was zero, compared with $152 million at year-end. A $350 million commercial-paper program is supported by a $350 million bank facility committed through October 2017. Management said covenant measures were substantially above required minimums.
- Nine-month dividends paid totaled $93.2 million; the quarterly dividend was $0.31 per share. The October declaration maintained a $0.31 quarterly dividend.
Changes by segment and unusual items
- Q3 sales grew 2.7%, primarily on higher volume/mix and prices. Display and Packaging sales increased 14.9% and segment operating profit rose 73.8%; Paper and Industrial Converted Products profit rose 13.8%.
- Consumer Packaging Q3 sales were nearly flat and profit increased 11.9%. Protective Solutions sales rose 1.4%, but profit fell 6.7% amid unfavorable mix, higher costs, and Mexico start-up inefficiencies.
- Q3 GAAP results included $5.8 million of restructuring and impairment charges. Nine-month charges were $18.8 million. Management expected approximately $5 million of additional charges for announced actions, mostly incurred and paid by year-end, plus approximately $1.5 million for older actions.
- Two small Q3 acquisitions cost $3.7 million and are expected to add approximately $12.5 million in annual sales. The company also invested $3.6 million for a 12% interest in a Finnish affiliate.
- A $1.9 million pension settlement charge was recorded in Q2. The company expected approximately $11 million of additional pension and postretirement contributions in the remainder of 2013.
Outlook, risks and contingencies
- The filing provides no specific full-year earnings or EPS guidance. It expected approximately $55 million of capital spending in the remainder of 2013 and completion by year-end of a $75 million biomass-boiler project.
- The $118 million, 6.5% debentures mature in November 2013. Management expected to meet the obligation using cash, operating cash flow, and/or refinancing through available credit.
- Fox River and other environmental contingencies are material. Environmental accruals totaled $73.4 million; U.S. Mills’ reserves included $49.2 million for the broader Fox River matter and $3.2 million for the Site cleanup. The company said its additional consolidated exposure beyond reserves was limited to U.S. Mills’ approximately $94 million equity position, while noting significant uncertainty and pending appeals.
- No goodwill impairment was recorded in the annual third-quarter test. Management identified blowmolding and thermoforming as the reporting units most exposed to potential future impairment; estimated fair value exceeded carrying value by approximately 12% and 18%, respectively. Display and Packaging has significant customer concentration, with a major customer contract due for renegotiation over the next few years.
- Key risks include raw-material and energy costs, pricing and demand, productivity and restructuring execution, pension costs, foreign exchange, taxes, acquisition integration, and environmental liabilities. The company hedged some commodity and currency exposures.
Important facts for investors to verify
- Whether reported operating cash generation is sustainable, particularly given working-capital movements and tax-related timing benefits.
- The November debenture repayment or refinancing and subsequent debt and cash balances.
- Progress and realized savings from restructuring, alongside remaining charges and the biomass-boiler project’s cost and completion.
- Developments in Fox River litigation, remediation costs, and the adequacy of environmental reserves.
- Performance and valuation assumptions for blowmolding and thermoforming, and retention of the concentrated Display and Packaging customer.
- Whether GAAP results and company-defined base earnings reconcile as presented and whether segment trends persist.