Sonoco Products Company — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended July 3, 2011, compared with the periods ended June 27, 2010. Amounts below are in millions of dollars except per-share data. The first half of 2011 included six more days than the comparable 2010 period. Interim statements are unaudited and were reviewed, not audited, by the independent accountant.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $1,127.9 | $1,010.1 | $2,245.2 | $1,945.2 |
| Gross profit | $191.1 | $192.5 | $385.3 | $368.3 |
| Gross margin | 16.9% | 19.1% | 17.2% | 18.9% |
| Income before interest and taxes | $82.2 | $90.4 | $171.8 | $166.0 |
| Net income attributable to Sonoco | $53.4 | $59.0 | $110.8 | $107.5 |
| Diluted EPS attributable to Sonoco | $0.52 | $0.58 | $1.08 | $1.05 |
| Base diluted EPS (non-GAAP) | $0.60 | $0.59 | $1.17 | $1.09 |
- Sales increased 11.7% in Q2 and 15.4% for the first half. Q2 growth reflected selling prices, acquisitions, foreign exchange and, to a lesser extent, volume. First-half sales growth also benefited from the extra calendar days.
- Q2 GAAP earnings fell despite higher sales: gross profit was slightly lower and operating income declined 9%. Base earnings, which exclude specified restructuring and other items, were nearly flat year over year in Q2 and higher for the first half. These are company-defined non-GAAP measures.
- Operating cash flow was $32.1 for the first half, down from $115.4. The company attributed the decline principally to pension and postretirement contributions of $110.5, versus $14.0 in the prior-year period. Capital spending was $80.2, making operating cash flow less capital spending negative $48.1.
- At July 3, cash was $134.0; current assets were $1,245.4 and current liabilities $786.6. Long-term debt was $716.8 and current debt $19.4, or total debt of approximately $736.2. Cash less total debt was approximately $602.2. Commercial paper outstanding was $140.0.
- Current assets exceeded current liabilities by $458.8, compared with $376.9 at year-end 2010. The company reported covenant interest coverage and net worth substantially above required minimums.
- Cash dividends were $0.29 per share in Q2. The board declared another $0.29 quarterly dividend, payable September 9, 2011.
Material changes and segment results
- Q2 sales rose in all segments: Consumer Packaging +14.9%, Tubes and Cores/Paper +9.7%, Packaging Services +8.8%, and All Other Sonoco +10.5%.
- Q2 segment operating profit declined 17.0% in Consumer Packaging to $35.0, was nearly unchanged in Tubes and Cores/Paper at $37.3, increased to $8.2 from $3.6 in Packaging Services, and rose 20.1% in All Other Sonoco to $12.3.
- For the first half, Consumer Packaging operating profit fell 7.8% to $80.9; Tubes and Cores/Paper rose 12.7% to $65.9; Packaging Services rose 65.9% to $14.3; and All Other Sonoco rose 29.4% to $22.8.
- Compared with December 31, 2010, total assets increased to $3,393.6 from $3,281.0, total equity rose to $1,602.4 from $1,507.7, and long-term debt increased to $716.8 from $603.9. Pension and other postretirement liabilities declined to $227.1 from $323.0.
Outlook, commentary and risks
- Management expected full-year 2011 operating cash flow of approximately $260, including anticipated pension and postretirement contributions of about $141. It expected an additional $60–$70 of capital spending during the rest of 2011 and approximately $31 of additional benefit-plan contributions.
- Management expected Consumer Packaging cost and operating inefficiencies associated with higher input costs and a blow-molded-plastics ramp-up to ease in the second half as pricing adjusted and operations stabilized.
- A contract-packing customer moved its work to another provider effective July 1. Management expected notably lower Packaging Services operating profit in the second half, while anticipating new business would limit long-term adverse impact.
- Restructuring and asset-impairment charges were $9.6 in Q2 and $11.9 for the first half. The Brazil plastics-business sale contributed a $6.7 pretax loss; management estimated approximately $2.7 of additional cash costs for previously announced restructuring actions, mostly to be paid by year-end 2011. Approximately $0.9 of future pretax charges was expected for earlier actions, primarily by the end of 2012.
- Raw-material, energy, freight and labor costs, pricing pressure, business mix, demand, pension funding, foreign exchange, interest rates, acquisition integration and restructuring execution were identified risks. The company uses commodity and currency derivatives to hedge exposures; hedge values and input costs may affect results.
- Management reported no goodwill impairment triggering event during the period, but identified Matrix Packaging and other reporting units for monitoring. Weaker-than-projected Matrix Packaging results could lead to a goodwill impairment charge; Matrix Packaging goodwill was approximately $132.
- Environmental and legal contingencies include Fox River PCB matters. Environmental reserves totaled $61.0, including $57.8 related to U.S. Mills. The company estimated its share of remaining cleanup costs at the specific Site at $3.2, while noting uncertainty around broader Fox River exposure and litigation. It also faces a shareholder class action seeking unspecified damages. Management could not estimate the final outcome of many proceedings.
- No specific full-year earnings or sales guidance is provided in the supplied filing text. The company cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether pricing actions offset rising raw-material, energy, freight and labor costs, and whether margins recover after the Q2 decline.
- Whether forecast operating cash flow, capital spending and pension contributions develop as expected, and the effect on borrowing and liquidity.
- The second-half earnings impact of the lost contract-packing business and the pace of replacement business.
- Progress and cash costs of restructuring, including whether the Brazil divestiture and other unusual items are fully reflected in reported and base results.
- Updates to Matrix Packaging and other goodwill assessments, and to Fox River environmental liabilities and the shareholder litigation.
- Debt levels, commercial-paper funding and compliance with credit covenants; the company also entered a separate $50 revolving facility on July 5, 2011, expiring July 3, 2012.