Sonoco Products Company — Q1 2012 Form 10-Q
Reporting period: Three months ended April 1, 2012, compared with the three months ended April 3, 2011. Unaudited interim financial statements were reviewed, not audited. Unless noted otherwise, amounts below are in millions of dollars.
Business context and operating results
Sonoco supplies consumer, industrial and protective packaging and packaging services, operating through four reportable segments. Results include Tegrant, acquired in November 2011; Tegrant contributed approximately $114 million of first-quarter sales.
- Net sales rose 8.5% to $1,212.4 million from $1,117.3 million. Acquisitions/dispositions added about $115 million, primarily from Tegrant; volume and mix reduced sales by $11 million, pricing added $8 million, and foreign currency and other effects reduced sales by $17 million. Excluding acquisitions, sales were down approximately 2%.
- Gross profit increased to $216.9 million from $194.2 million; gross margin was approximately 17.9%, versus 17.4%.
- Operating income fell 12.0% to $78.8 million from $89.6 million; reported operating margin was approximately 6.5%, versus 8.0%. The 2012 figure includes $15.2 million of restructuring and impairment charges.
- Net income attributable to Sonoco declined to $43.1 million from $57.4 million. Diluted EPS was $0.42 versus $0.56. Company-defined base diluted EPS was $0.52 versus $0.57; base earnings exclude specified charges and adjustments.
- Interest expense, net, increased to $15.4 million from $8.7 million, primarily reflecting higher debt following the Tegrant acquisition. The effective tax rate rose to 34.5% from 31.1%.
Segment performance
- Consumer Packaging: Sales $495.8 million, down 0.5%; operating profit $50.1 million, down 2.1%.
- Paper and Industrial Converted Products: Sales $463.6 million, down 1.6%; operating profit $32.3 million, up 6.6%.
- Packaging Services: Sales $114.9 million, down 6.9%; operating profit $4.8 million, down 25.4%, mainly due to lower volume after a major customer business loss.
- Protective Packaging: Sales $138.1 million versus $24.3 million, and operating profit $7.0 million versus $3.2 million, primarily reflecting Tegrant. Legacy operations’ operating profit increased by more than 10%.
Cash flow, liquidity and debt
- Cash provided by operations was $101.5 million, versus cash used of $13.8 million a year earlier. The comparison benefited from lower pension and postretirement contributions, lower incentive payments and reduced working-capital funding needs; both periods included approximately $20 million of prior-year tax refunds.
- Investing cash outflow was $47.7 million, including $48.0 million of capital spending. Financing cash outflow was $58.5 million, including $29.2 million of dividends and net debt repayments.
- Cash was $176.1 million at April 1, 2012, nearly unchanged from year-end. Total debt, including current debt, was approximately $1,251.9 million, down $34.7 million during the quarter.
- Current assets were $1,350.4 million and current liabilities $884.7 million; the derived current ratio was approximately 1.53. A $350 million commercial-paper program is supported by a matching bank facility committed through October 2015; commercial paper outstanding was $8 million. The company reported covenant measures substantially above required minimums.
- Management expected approximately $385 million of operating cash flow for 2012, about $140 million of additional capital spending during the remainder of the year, and approximately $22 million of further benefit-plan contributions in 2012.
Material changes, outlook and unusual items
- Restructuring and asset impairment charges were $15.2 million, compared with $2.3 million in Q1 2011. 2012 actions include planned closures of a German paper mill, two blow-molding facilities in North America and a U.S. protective-packaging operation, as well as workforce reductions. Approximately $12.1 million of additional charges were expected for announced actions, mostly to be incurred and paid by year-end 2012.
- Management cited positive price/cost and productivity benefits, offset by lower volume and unfavorable mix, and higher pension, labor and other costs. Without Tegrant, operating profit was down approximately 3%. Raw-material pricing and availability, demand, customer retention, restructuring execution, integration of acquisitions, foreign exchange, pension costs and environmental matters are among the stated risks.
- The board declared a $0.29-per-share quarterly dividend, paid in March, and declared a $0.30 dividend payable in June. No shares were repurchased under the public authorization; 103,369 shares were acquired to meet employee tax-withholding obligations.
- Environmental accruals totaled $72.2 million, including $56.5 million for U.S. Mills-related matters and $12.8 million for Tegrant sites. Fox River remediation and related proceedings remain uncertain; the company stated its view that its maximum additional consolidated exposure for U.S. Mills legacy liabilities is limited to U.S. Mills’ approximately $88 million equity value.
- A proposed settlement of a shareholder class action was filed on April 26, 2012. If court-approved and subject to its conditions, the settlement fund would be funded entirely by insurance.
- Goodwill was $1,110.5 million. No impairment trigger occurred during the quarter, but management identified Blow Molded Plastics (Matrix) and Flexible Packaging as reporting units with greater potential impairment risk if results fall short of expectations.
Important facts for investors to verify
- Whether the expected $385 million of 2012 operating cash flow and planned capital spending are achieved.
- Whether volume, mix, customer losses and higher costs continue to pressure underlying earnings, and whether Tegrant integration and synergies meet expectations.
- The timing and cash cost of announced restructuring actions and the anticipated additional charges.
- Developments in Fox River and other environmental matters, including potential changes to reserves or the company’s estimated exposure.
- Future debt, benefit-plan funding, commodity and currency exposures, and progress on goodwill-risk reporting units.