Sonoco Products Company — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing is an annual report, not a standalone fourth-quarter report; selected Q4 figures are included below. Sonoco manufactures consumer and industrial packaging and provides packaging services, operating 315 locations in 34 countries.
Financial performance and liquidity
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Net sales | $4.124 billion | $3.597 billion |
| Gross profit / gross margin | $767.5 million / 18.6% | $666.0 million / 18.5% |
| Net income attributable to Sonoco | $201.1 million; $1.96 diluted EPS | $151.5 million; $1.50 diluted EPS |
| Management-defined base earnings | $239.4 million; $2.34 diluted EPS | $179.8 million; $1.78 diluted EPS |
| Cash from operations | $375.1 million | $391.0 million |
| Capital expenditures | $145.9 million | $104.2 million |
| Total debt | $620.9 million | $580.8 million |
| Cash and cash equivalents | $158.2 million | $185.2 million |
| Current ratio | 1.5 | 1.2 |
Sales increased 14.6%, driven by volume/mix (+$209 million), selling prices (+$142 million), acquisitions (+$77 million), corrugating-medium sales (+$66 million), and currency/other (+$33 million). Companywide volume rose approximately 6%. The effective tax rate was 25.3%, versus 31.2% in 2009.
Operating cash flow declined despite higher earnings, mainly because increased business activity absorbed cash in receivables and inventory. Investing cash outflow was $283.7 million, including $137.8 million for acquisitions; financing cash outflow was $116.6 million. Year-end working capital was $376.9 million. Debt to total capital was 29.2%, compared with 29.6%.
In Q4 2010, sales were $1.127 billion and net income attributable to Sonoco was $34.5 million, or $0.33 diluted EPS; Q4 2009 figures were $1.002 billion, $47.1 million, and $0.46, respectively.
Material changes and segment results
- Tubes and Cores/Paper sales rose 22.8% to $1.645 billion and segment operating profit increased 80.1% to $130.2 million, reflecting recovery in volumes, higher selling prices and productivity. Higher recovered-paper costs, averaging about 140% above 2009, were only partly recovered through pricing.
- Consumer Packaging sales increased 7.6% to $1.668 billion and segment operating profit rose 5.8% to $179.8 million. The APT acquisition, productivity and lower pension costs helped; unfavorable price/cost effects and higher labor, freight and energy costs offset some gains.
- Packaging Services sales rose 10.0% to $469.1 million and operating profit rose 13.6% to $12.5 million. New international business offset customer losses, but replacement work carried lower margins.
- All Other Sonoco sales increased 21.5% to $341.5 million and operating profit rose 57.6% to $41.6 million.
Sonoco reported a $48.6 million pretax loss on early debt extinguishment. It issued $350 million of 5.75% bonds due 2040, tendered $244.1 million face value of existing bonds for $293.3 million, and repaid $100 million of bonds at maturity. Restructuring and asset-impairment charges were $24.0 million pretax ($15.5 million after tax), including a $12.6 million impairment tied to a customer contract that will not be fully renewed. Four acquisitions were completed for a recorded cost of $138.3 million, principally APT.
Outlook, risks and contingencies
- For 2011, management expected demand near recent-quarter levels and volume growth of 2%–4%; it anticipated recovering most late-2010 material cost increases, maintaining a neutral price/cost relationship, and further productivity gains. Expected 2011 capital spending was $140–$150 million and the effective tax rate approximately 31%.
- Longer-term goals set in December 2010 included $5.5–$6.0 billion in sales by 2014, EBIT margins of 11% versus a stated current 9.4%, and return on net assets employed of 12.5% versus 11%. Growth plans rely on organic sales, international expansion and acquisitions; these are targets, not guarantees.
- Environmental liabilities totaled approximately $62.0 million accrued. The Fox River matter is the largest identified exposure: U.S. Mills had a $55.5 million reserve for OUs 2–5, excluding the separate hotspot reserve. Estimated total project remediation costs ranged from $390 million to more than $600 million; Sonoco stated its consolidated exposure was effectively limited to U.S. Mills’ approximately $85 million equity value. Natural-resource damages were not reserved, and outcomes remain uncertain.
- Sonoco faces a securities class action alleging misleading public statements during 2007; the company says it will defend the suit. The filing states that the ultimate outcome of some legal matters cannot be estimated clearly.
- Defined benefit and postretirement plans were underfunded by approximately $334 million at year-end. The company made an $85 million U.S. pension contribution in January 2011 and expected total 2011 plan contributions of approximately $118 million.
- Key operating risks include raw-material, energy and freight inflation; competitive pricing and customer contract losses; economic and foreign-exchange changes; acquisition and restructuring execution; pension assumptions; and environmental remediation. Procter & Gamble generated about 10% of 2010 revenue and 8% of year-end receivables. The five largest Packaging Services customers represented about 72% of segment sales.
Important facts for investors to verify
- Reconcile GAAP net income and EPS with management’s non-GAAP “base” earnings and review the adjustments, especially debt-tender, restructuring and tax items.
- Track whether volume growth and pricing recover raw-material, energy and freight inflation, particularly OCC costs.
- Assess cash conversion and working-capital requirements as sales grow, alongside acquisition spending, dividends and share repurchases.
- Monitor the Fox River litigation, remediation estimates, potential natural-resource damages and the stated limit on Sonoco’s consolidated exposure.
- Review pension funding needs and the sensitivity of obligations and expense to discount rates and asset returns.
- Test the 2011 outlook and 2014 goals against customer attrition, replacement-business margins, acquisitions and goodwill impairment risks.