Sonoco Products Company — Q1 2011 Form 10-Q
Reporting period: Three months ended April 3, 2011, compared with the three months ended March 28, 2010. The 2011 quarter had 93 days, six more than the prior-year quarter. Sonoco manufactures consumer and industrial packaging and provides packaging services. Financial statements are unaudited; the auditor performed a review, not an audit. Unless noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales | $1,117.3 | $935.1 |
| Gross profit / margin | $194.2 / 17.4% | $175.8 / 18.8% |
| Income before interest and taxes | $89.6 | $75.7 |
| Net income attributable to Sonoco | $57.4 | $48.6 |
| Diluted earnings per share | $0.56 | $0.48 |
| Base net income attributable to Sonoco | $58.6 | $51.0 |
| Base diluted earnings per share | $0.57 | $0.50 |
Sales increased 19.5%; management attributed the $182 million increase to volume/mix (including the extra days), higher selling prices, acquisitions, and favorable currency translation. Consolidated operating profit rose 18.4%. Base results are non-GAAP measures that exclude specified restructuring and other items.
Gross margin declined to 17.4% from 18.8%, reflecting business mix, regional differences in recovered-paper prices, and higher freight, labor, and other costs. Lower pension and postretirement expenses partly offset cost pressures. Net interest expense was $8.7 million versus $8.4 million, and the effective tax rate was 31.1% versus 29.6%.
Segment sales and operating profit: Consumer Packaging sales were $459.4 million and profit $45.9 million; Tubes and Cores/Paper, $444.1 million and $28.6 million; Packaging Services, $121.2 million and $6.1 million; All Other Sonoco, $92.7 million and $10.5 million. Tubes and Cores/Paper and All Other Sonoco profits increased 33.1% and 42.5%, respectively. Consumer Packaging profit was nearly flat; Packaging Services profit increased 20.0%.
Cash flow, debt, and liquidity
- Operating cash flow was negative $13.8 million, versus positive $73.8 million a year earlier. The company cited an $88.1 million year-over-year increase in pension and postretirement contributions and higher working capital associated with business activity.
- Investing cash outflow was $36.5 million, including $38.3 million of capital expenditures. Financing provided $71.7 million, including a $140.0 million increase in commercial paper, and included $28.1 million of dividends and $47.5 million of share repurchases.
- Cash increased to $185.2 million from $158.2 million at year-end. Total debt was approximately $766.3 million, up $145.4 million during the quarter; reported long-term debt, including its current portion, was $766.3 million.
- Sonoco reported a $350 million commercial-paper program backed by a $350 million credit facility committed through October 2015. Commercial paper outstanding was $170 million. The company said it was substantially above minimum interest-coverage and net-worth covenant requirements.
- Defined-benefit and retiree health-plan contributions were $89.6 million during the quarter, including $85.1 million to the U.S. qualified pension plan. The balance sheet reported cash and cash equivalents of $185.2 million and current liabilities of $803.6 million.
Outlook, commentary, and risks
- Management expected 2011 operating cash flow of approximately $340 million, additional capital spending of $100–$110 million during the remainder of the year, and about $19 million of additional benefit-plan contributions. The filing did not provide a clear full-year earnings or EPS guidance figure.
- About $2.45 million of future cash restructuring costs were expected for previously announced actions, mostly to be incurred and paid by the end of 2011. Further restructuring remained possible. Management expected the majority of remaining costs from several older restructuring programs to be paid by year-end 2011.
- Packaging Services expected sales to a major customer to be about $20 million lower in the first half of 2011 than in the comparable 2010 period; another customer was expected to consolidate business with another vendor beginning in Q3 2011. Management did not expect these losses to materially harm the segment over the long term, citing anticipated new business.
- Raw-material and energy prices, freight and labor costs, demand and pricing pressures, foreign exchange, interest rates, pension obligations, restructuring execution, and acquisition integration were identified among the risks to results. The company used commodity and currency hedges; these do not eliminate exposure.
- Environmental contingencies include the Fox River matter. Sonoco reported $61.7 million of total environmental accruals, including $58.4 million related to U.S. Mills. It said the maximum additional exposure to Sonoco’s consolidated financial position was limited to U.S. Mills’ equity, approximately $85 million, while noting that the ultimate outcome and potential losses could not be reliably estimated. A separate securities class action seeks unspecified damages; Sonoco said it would defend the claims.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing cautions that quarterly results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether revenue and operating-profit growth persist after accounting for the six additional days, pricing, acquisition contribution, and currency effects.
- Whether margins recover as input, freight, labor, and other costs change, and whether pricing offsets those costs.
- Whether the approximately $340 million operating-cash-flow expectation is achieved, given the unusually large pension contribution and working-capital use.
- Debt and commercial-paper levels, covenant headroom, and planned capital spending, dividends, and share repurchases.
- Developments in Fox River and other legal and environmental matters, including any change in estimated exposure or recoveries.
- Progress replacing Packaging Services customer business and realizing expected restructuring savings and acquisition benefits.