Sonoco Products Company — Q2 2012 Form 10-Q
Business context and reporting period. Sonoco makes consumer, industrial and protective packaging and provides packaging services. The filing covers the three and six months ended July 1, 2012; comparisons are with the periods ended July 3, 2011. Sonoco reports four segments: Consumer Packaging, Paper and Industrial Converted Products, Packaging Services, and Protective Packaging. The 2011 comparison excludes Tegrant, acquired in November 2011. Financial statements are unaudited; the independent accountant performed a review, not an audit.
Key financial metrics
Dollar amounts below are in millions, except per-share data and ratios.
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $1,202.4 | $1,127.9 | $2,414.7 | $2,245.2 |
| Gross profit / gross margin | $216.5 / 18.0% | $191.1 / 16.9% | $433.4 / 17.9% | $385.3 / 17.2% |
| Income before interest and taxes / margin | $88.6 / 7.4% | $82.2 / 7.3% | $167.4 / 6.9% | $171.8 / 7.7% |
| Net income attributable to Sonoco | $51.3 | $53.4 | $94.4 | $110.8 |
| Diluted EPS | $0.50 | $0.52 | $0.92 | $1.08 |
| Company-defined base diluted EPS | $0.58 | $0.60 | $1.11 | $1.17 |
- Cash flow: First-half operating cash flow was $144.4 million, versus $32.1 million. Capital expenditures were $104.4 million, implying operating cash flow less capital expenditures of about $39.9 million, compared with negative $48.1 million in the prior-year period. Dividends paid were $59.3 million.
- Liquidity and debt: At July 1, cash was $196.0 million; current assets were $1,363.6 million and current liabilities $836.5 million (current ratio about 1.63). Total debt, including current debt, was $1,319.0 million, up from $1,286.6 million at year-end 2011. Sonoco had $82 million of commercial paper outstanding and a $350 million commercial paper program backed by a credit facility committed through October 2015.
- Dividends: Quarterly dividend was $0.30 per share; the July 18 declaration is payable September 10, 2012.
Material changes versus the prior comparable periods
- Sales increased 6.6% in Q2 and 7.6% in the first half, primarily from Tegrant. First-half sales also reflected $9 million of higher selling prices, offset by $24 million of adverse volume/mix and $53 million of adverse currency translation and other effects.
- GAAP net income attributable to Sonoco and diluted EPS declined in both comparative periods. Base diluted EPS also fell, to $0.58 from $0.60 in Q2 and to $1.11 from $1.17 for the first half.
- Tegrant drove most of Protective Packaging’s reported sales growth. Packaging Services operating profit fell 53.8% in Q2 and 41.7% in the first half, primarily reflecting reduced volume after the loss of a major contract-packaging customer. Excluding Tegrant, management said overall operating profit was lower year over year.
- First-half restructuring and asset impairment charges rose to $24.6 million from $11.9 million. Net interest expense rose to $30.7 million from $16.9 million, mainly due to higher debt following the Tegrant acquisition. The first-half effective tax rate increased to 35.0% from 31.6%.
Outlook, management commentary, risks and contingencies
- The filing does not provide a clear full-year earnings or EPS guidance figure. Management expected approximately $100 million of additional capital spending, net of asset-sale proceeds, during the remainder of 2012, and approximately $13 million of additional pension and postretirement contributions.
- Management expected about $10.5 million of additional charges for previously announced restructuring actions, with most expected to be incurred and paid by year-end 2012. It also expected approximately $0.75 million of future pretax charges for older actions. Management noted additional restructuring could be undertaken.
- Management cited lower volume and unfavorable mix, foreign-exchange headwinds, and higher pension, labor and other costs as pressures; positive price/cost and productivity improvements partly offset them. It cautioned that interim results are not necessarily indicative of full-year results.
- Key risks include raw-material availability and pricing, demand and pricing pressure, economic and foreign-exchange movements, pension obligations, restructuring execution, acquisition integration, tax contingencies, and environmental liabilities. Commodity and currency contracts hedge portions of forecast costs and exposures; commodity hedges had a net fair-value loss of $11.6 million at July 1.
- Environmental and legal matters: Sonoco reported $77.5 million of accrued environmental contingencies. U.S. Mills’ Fox River reserves included $3.2 million for the defined remediation site and $52.7 million for potential liabilities relating to the broader river area. Sonoco said its maximum additional consolidated exposure for the legacy U.S. Mills liabilities was limited to that subsidiary’s approximately $89 million equity position, while noting significant uncertainty in allocation and ultimate costs. A shareholder class action settlement filed in April 2012 was subject to final court approval and was to be funded entirely by insurance.
- Goodwill impairment testing in 2011 found no impairment, and the company reported no triggering events in the first half of 2012. Management identified Blow Molded Plastics and Flexible Packaging as reporting units with comparatively greater future impairment risk if results fall short of expectations.
Most important facts for investors to verify
- How much of reported sales and Protective Packaging growth reflects Tegrant, and whether acquired operations deliver expected earnings and integration benefits.
- Whether volume, mix, Packaging Services customer losses, currency effects and higher pension and operating costs persist, and whether pricing and productivity offset them.
- Debt, interest expense, cash generation, capital spending and pension contributions, including compliance with debt covenants.
- The timing and cash cost of restructuring actions and whether further restructuring is required.
- Developments in Fox River remediation and allocation of environmental costs, as well as final approval and implementation of the insured class-action settlement.