SON

Business Context and Reporting Period

Company: Sonoco Products Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 28, 2010
Business Overview: Sonoco is a leading manufacturer of industrial and consumer packaging products and provider of packaging services, operating in over 35 countries. The company reports results through three primary segments: Consumer Packaging, Tubes and Cores/Paper, and Packaging Services, with remaining operations classified as "All Other Sonoco."

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 16.8% year-over-year, driven by a 9% volume/mix increase, a $37 million favorable foreign currency impact, and higher selling prices (particularly for recovered paper).
• Profitability: Net income attributable to Sonoco more than doubled, rising from $23.1 million to $48.6 million. This was aided by lower restructuring charges ($3.9 million in 2010 vs. $7.2 million in 2009) and reduced pension expenses.
• Segment Performance:
  • Tubes and Cores/Paper: Sales surged 28.3% and operating profit jumped 218.8% due to volume growth and productivity improvements, despite unfavorable price/cost relationships on raw materials.
  • Consumer Packaging: Sales rose 7.5% and operating profit increased 15.9%.
  • Packaging Services: Sales grew 20.5% with operating profit increasing 675.5%.
• Working Capital: Operating cash flow decreased slightly despite higher earnings, primarily due to increases in net working capital (receivables and inventories) driven by higher business activity.

Guidance, Outlook, and Risks

• Outlook: Management expects operating cash flows to remain strong for the remainder of 2010. The second quarter is expected to show greater benefits in selling prices from the rise in Old Corrugated Containers (OCC) prices.
• Restructuring: The company expects to incur approximately $4.7 million in future cash costs related to previously announced restructuring actions, with the majority to be paid by the end of 2010.
• Customer Risks: The Packaging Services segment expects to lose approximately $45 million in annualized sales volume by the second half of 2010 due to a major customer's bidding process. Another customer intends to consolidate business by 2012, representing a potential $35 million annual reduction. Management believes new business growth will offset these losses long-term.
• Environmental Contingencies: The company faces significant potential liabilities related to PCB contamination in the Fox River (Wisconsin) involving its subsidiary U.S. Paper Mills Corp. While the company believes its exposure is limited to the equity of the subsidiary (approx. $80 million), the upper end of the potential loss range may exceed this amount.
• Legal Proceedings: The company is a defendant in a purported class action lawsuit regarding stock purchases between 2007 and 2007, alleging false and misleading statements.

Investor Verification Checklist

• Raw Material Costs: Verify the sustainability of the price/cost relationship for recovered paper (OCC) and resin, as rising input costs could compress margins if not passed through to customers.
• Customer Concentration: Monitor the Packaging Services segment for the impact of the anticipated $45 million and $35 million sales losses from major customers.
• Environmental Liability: Review the status of the Fox River remediation litigation and the financial health of the U.S. Mills subsidiary to assess the risk of the $80 million equity exposure.
• Debt Maturity: Confirm the refinancing strategy for the $100 million debenture due in November 2010.
• Base Earnings: Analyze "Base" earnings (excluding restructuring) which were $51.0 million ($0.50/share) to understand core operational performance versus GAAP results.