Sonoco Products Company — 2011 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2011; it is an annual report, not a standalone fourth-quarter filing. Sonoco manufactures consumer and industrial packaging and provides packaging services, operating 349 locations in 34 countries. In Q4 2011, it reported net sales of $1.130 billion and net income attributable to Sonoco of $29.5 million, or $0.29 diluted per share.
Financial performance and position
- Revenue: Full-year net sales were $4.499 billion, up 9.1% from $4.124 billion in 2010. Higher prices contributed $176 million, acquisitions $135 million, volume/mix $16 million and currency/other $48 million. Volume was modestly positive overall; higher prices and acquisitions accounted for most of the increase.
- Profit and margins: Net income attributable to Sonoco was $217.5 million, up from $201.1 million; diluted EPS was $2.13 versus $1.96. GAAP income before interest and taxes was $322.5 million, down from $338.2 million. Gross margin fell to 16.8% from 18.6%; SG&A was 8.8% of sales versus 9.8%. Base earnings, a non-GAAP measure, declined to $233.6 million ($2.29 per diluted share) from $239.4 million ($2.34).
- Cash flow and investment: Operating cash flow was $245.3 million, down from $375.1 million, principally reflecting higher pension contributions. Capital spending was $173.4 million, up from $145.9 million; operating cash flow less capital spending was approximately $71.9 million. Investing cash use totaled $729.2 million, including $566.9 million for acquisitions. Cash and equivalents ended the year at $175.5 million.
- Debt and liquidity: Total debt rose to $1.287 billion from $620.9 million; debt-to-total-capital increased to 47.4% from 29.2%. The increase primarily funded the Tegrant acquisition. Current ratio improved to 1.6 from 1.5; net working capital was $476.3 million. The company had a $350 million committed credit facility through October 2015 and $27 million of commercial paper outstanding.
- Other key metrics: Dividends were $1.15 per share, versus $1.11 in 2010. The defined-benefit and postretirement plans’ aggregate underfunded position was approximately $433 million at year-end, compared with $334 million a year earlier. Total equity decreased to $1.425 billion from $1.508 billion.
Material changes versus 2010
- Tegrant was acquired on November 8, 2011, for $550 million cash, adding protective, temperature-assured and retail-security packaging businesses. The acquisition added approximately $460 million in expected annualized sales; the new Protective Packaging segment also includes Sonoco’s legacy business.
- Debt increased substantially to finance the acquisition: Sonoco issued $500 million of notes and entered a $150 million three-year term loan.
- Operating pressure reduced gross margin and base earnings despite higher sales. Management cited unfavorable business mix, inflation in labor and other costs, and productivity below historical standards; pricing offset increases in materials, energy and freight.
- Cash from operations fell by $129.8 million, with higher benefit-plan contributions accounting for most of the decline. Benefit-plan contributions were $142.1 million, compared with $29.2 million in 2010.
- Restructuring and asset impairment charges were $36.8 million pretax, compared with $24.0 million. The company announced facility closures and eliminated approximately 160 positions.
Outlook, commentary and risks
- 2012 outlook: Management expected revenue to increase approximately $450 million year over year, mainly from acquisitions, including Tegrant, plus volume and, to a lesser extent, price; currency was expected to partly offset growth. Excluding Tegrant, expected volume growth was approximately 1%. Management targeted improved margins through productivity, cost reduction and a moderately positive price/cost relationship, and targeted Tegrant annualized synergies of up to $12 million.
- Management forecast approximately $190 million in 2012 capital spending, $73 million of pension and postretirement contributions, and a base-earnings effective tax rate of approximately 33.6%. Benefit-plan expense was expected to rise approximately $14 million.
- Principal risks: Raw-material, energy, freight and labor cost volatility; pricing and demand pressure; economic weakness; acquisition integration and synergy realization; pension funding sensitivity to discount rates and asset returns; foreign exchange and credit-market risks; and environmental liabilities. Five customers represented 61% of Packaging Services sales; the largest customer represented about 9% of consolidated revenue and 8% of receivables.
- Contingencies: Environmental reserves totaled $72.6 million, including $56.8 million associated with U.S. Paper Mills. The Fox River matter remains uncertain; Sonoco stated that its maximum additional consolidated exposure was essentially limited to U.S. Mills’ approximately $87 million equity position. A securities class-action lawsuit also remained pending. Management said the ultimate outcomes of certain claims cannot be estimated with certainty.
- Unusual items: 2011 earnings included a $15.0 million tax benefit from deferred-tax valuation-allowance adjustments and a $3.1 million after-tax gain on insurance proceeds, among other items. Management’s reconciliation shows 2011 base earnings exclude restructuring, acquisition-related and other specified adjustments. Base measures are non-GAAP and should be considered alongside GAAP results.
Important facts for investors to verify
- Whether Tegrant integration delivers the expected synergies and contributes profitably; 2011 results include only post-acquisition operations.
- Whether cost recovery, productivity and demand improve enough to stabilize margins and support management’s 2012 outlook.
- Debt repayment capacity and covenant headroom after the acquisition-related increase in leverage.
- Changes in pension funding status and expense, including the effect of discount rates and investment returns.
- Developments in Fox River remediation, allocation of costs and appeals, and whether environmental reserves remain adequate.
- Quarterly results and non-GAAP-to-GAAP reconciliations; Q4 net income attributable to Sonoco was $29.5 million versus $34.5 million in Q4 2010.