Sonoco Products Company — Q1 2013 Form 10-Q
Business context and period. Sonoco provides consumer and industrial packaging, protective packaging, and packaging supply-chain services through four segments. This unaudited report covers the three months ended March 31, 2013; comparisons are with the three months ended April 1, 2012. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2013 | Prior-year period | Change |
|---|---|---|---|
| Net sales | $1,179.2 million | $1,212.4 million | Down 2.7% |
| Gross profit / gross margin | $205.7 million / 17.4% | $216.9 million / 17.9% | Margin down about 0.5 percentage point |
| Income before interest and taxes | $81.4 million | $78.8 million | Up 3.3% |
| Net income attributable to Sonoco | $48.1 million; $0.47 diluted EPS | $43.1 million; $0.42 diluted EPS | Up 11.8% |
| Base net income attributable to Sonoco | $51.7 million; $0.50 per diluted share | $53.8 million; $0.52 per diluted share | Down 3.9% |
| Operating cash flow | $136.3 million | $97.5 million | Up $38.8 million |
| Cash and cash equivalents | $163.5 million | $373.1 million at Dec. 31, 2012 | Down $209.6 million |
| Total debt, including current portion | $1,114.6 million | $1,373.1 million at Dec. 31, 2012 | Down about $258.5 million |
Base figures are non-GAAP measures that exclude specified restructuring, impairment, and other items. Base operating profit was 7.3% of sales, versus 7.8% a year earlier. Q1 restructuring and asset impairment charges were $4.3 million, versus $15.2 million; the 2013 base reconciliation also excludes $0.9 million of other adjustments, primarily from Venezuela’s currency devaluation.
Investing activities used $58.9 million, including $55.5 million of capital expenditures. Financing activities used $283.3 million, principally reflecting $143.5 million of debt repayments, a $129.0 million decrease in commercial paper, and $30.3 million of dividends. The company reported $23 million of commercial paper outstanding and access to a $350 million committed credit facility through October 2017. Management said financial covenants were substantially above required minimums. The balance sheet shows current assets of $1,290.0 million and current liabilities of $963.8 million at quarter-end.
Material changes and segment trends
- Sales fell $33 million, mainly from lower volume and mix ($25 million), with lower selling prices and foreign currency translation and other effects each contributing $4 million.
- Consumer Packaging sales declined 6.5% and segment operating profit fell 15.5%, to $42.3 million. Management cited lower volume, a negative price-cost relationship, higher expenses, and a $1.7 million LIFO inventory adjustment.
- Paper and Industrial Converted Products sales fell 2.0% and operating profit fell 4.0%, to $31.0 million, primarily on lower volume and higher costs.
- Display and Packaging sales increased 4.3%, while operating profit decreased slightly to $4.7 million; much of the contract-packing volume growth was at low margins.
- Protective Solutions sales rose 2.7% and operating profit increased 21.7%, to $8.5 million, aided by volume, synergies, and productivity.
- GAAP net income increased, but base earnings and base EPS declined. Lower restructuring charges, a lower effective tax rate, and reduced net interest expense supported reported results; the tax rate benefit partly reflected period-specific changes in uncertain-tax-position accruals.
Outlook, commentary, risks, and unusual items
- Management expected approximately $155 million of capital spending during the remainder of 2013 and completion by year-end of a $75 million biomass boiler project at the Hartsville complex.
- Sonoco anticipated about $26 million of additional pension and postretirement contributions in 2013, bringing expected full-year contributions to approximately $41 million.
- The filing expects about $5.5 million of additional charges for previously announced restructuring actions; the majority was expected to be incurred and paid by year-end 2013. Further restructuring remains possible.
- Management attributed operating pressure to volume softness, higher maintenance, labor, pension, and other costs. Productivity and price-cost improvements partly offset those pressures. It said identified Consumer Packaging production and quality issues had been resolved and should not affect Q2 results.
- Goodwill impairment is a risk if performance assumptions are not achieved, particularly in Plastics—Blowmolding, Rigid Paper—Europe, and Plastics—Thermoforming. Display and Packaging also has significant sales concentration with one customer whose business will be renegotiated over the next few years.
- Environmental liabilities remain a significant contingency. Environmental reserves totaled $74.2 million at March 31, 2013, including $53.0 million related to U.S. Mills and $18.7 million to Tegrant. The Fox River reserve for potential liabilities related to Operating Units 2–5 was $49.8 million, in addition to $3.2 million for the separate remediation site. Sonoco said uncertainty over allocation and costs prevents a more confident estimate; it considers its maximum additional consolidated pretax exposure limited to U.S. Mills’ approximately $91 million equity value. Recovery from insurers or other parties is uncertain and was not recognized.
- Other key risks identified include raw-material availability and pricing, demand and pricing pressure, currency and commodity movements, pension obligations, tax contingencies, and execution of restructuring and acquisitions.
- The U.S. dollar’s strengthening generated a $19.6 million foreign-currency translation loss in other comprehensive income. Cash repatriation of approximately $254 million was used to repay debt; the company intended to repatriate a further $6 million during 2013. Repatriation of remaining offshore cash could trigger additional U.S. tax.
The 2012 comparative cash-flow statement was revised to classify $4.0 million of insurance proceeds as investing rather than operating cash flow; the company said the correction was not material. The independent accountant performed a review of the interim statements, not an audit, and expressed no audit opinion.
Important facts for investors to verify
- Whether Consumer Packaging volume and profit stabilize, and whether the identified plastics businesses meet assumptions used in goodwill testing.
- Progress on the biomass boiler, 2013 capital spending, restructuring costs and cash payments, and pension contributions.
- Future Fox River remediation costs, allocation among responsible parties, and the potential impact of environmental contingencies.
- Cash generation, debt repayment, commercial-paper usage, offshore cash plans, and any tax cost from future repatriations.
- Whether the reported-versus-base earnings gap and period-specific tax benefits affect comparability with subsequent quarters.