Sonoco Products Company — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended October 2, 2011; comparable periods ended September 26, 2010. Unaudited interim statements received a limited review, not an audit. Sonoco manufactures consumer and industrial packaging and provides packaging services.
Financial performance
Amounts below are in millions of dollars unless noted.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $1,124.2 | $1,051.7 | $3,369.4 | $2,997.0 |
| Gross profit | $186.7 | $199.6 | $572.0 | $567.9 |
| Gross margin | 16.6% | 19.0% | 17.0% | 18.9% |
| Income before interest and taxes | $84.8 | $84.9 | $256.6 | $250.9 |
| Net income attributable to Sonoco | $77.2 | $59.0 | $188.0 | $166.5 |
| Diluted EPS | $0.76 | $0.57 | $1.84 | $1.63 |
- Q3 sales rose 6.9%, mainly on higher selling prices ($54 million) and foreign currency translation ($23 million); volume/mix reduced sales by $4 million. Nine-month sales increased 12.4%, including higher prices, acquisitions, currency effects, and six additional calendar days versus 2010.
- Reported Q3 net income included an $18.8 million net tax benefit from deferred-tax valuation allowance adjustments. Management’s non-GAAP “base” diluted EPS was $0.66 in Q3 versus $0.65 a year earlier, and $1.82 for nine months versus $1.75. These measures exclude specified items and are not GAAP results.
- SG&A was $89.9 million in Q3, down 12.3%; it was 8.0% of sales versus 9.7%. Nine-month SG&A was $291.5 million, down 2.3%, and 8.7% of sales versus 9.9%.
- Q3 segment operating profit: Consumer Packaging $47.2 million (+1.9%); Tubes and Cores/Paper $33.9 million (-10.3%); Packaging Services $4.2 million (+119.0%); All Other Sonoco $13.2 million (+5.6%). Nine-month segment results were mixed: Consumer Packaging -4.4%, Tubes and Cores/Paper +3.7%, Packaging Services +75.5%, and All Other +19.6%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $131.9 million, down from $260.6 million. The filing attributes the decline principally to pension and postretirement contributions, which were $105.3 million higher year over year, and working-capital effects.
- Investing cash outflow was $125.6 million, including $124.5 million of capital expenditure and $10.9 million for acquisitions. Financing cash outflow was $13.0 million, including $86.0 million of dividends and $48.4 million of share repurchases, partly offset by increased commercial paper borrowing.
- Cash at October 2 was $146.3 million, compared with $158.2 million at year-end 2010. Total debt, including current debt, was approximately $735.2 million, up $114.3 million from year-end; commercial paper outstanding was $143.0 million versus $30.0 million. Current assets were $1,245.4 million and current liabilities $790.0 million.
- Management expected approximately $260 million of operating cash flow for full-year 2011, including anticipated pension and postretirement contributions of about $142 million, and another $20–30 million of capital spending in the remainder of 2011. It expected an additional $18 million of benefit-plan contributions in Q4.
- Debt covenants require minimum interest coverage and net worth; the company reported being substantially above the required levels.
Material changes, outlook and risks
- Margins weakened despite sales growth. Management cited unfavorable product mix, raw-material price/cost timing, and higher labor and other costs; productivity and lower pension costs partly offset these pressures. Recovered paper, resin, steel, energy, and freight costs were key factors.
- Q3 restructuring and asset-impairment charges were $12.0 million; nine-month charges were $23.9 million. Sonoco estimated about $15.8 million of additional charges from announced actions, with most expected to be incurred and paid by the end of 2012. The filing also reports a $6.7 million loss on the sale of a Brazilian plastics business.
- After quarter-end, Sonoco agreed to acquire Tegrant for $550 million cash, expected to add approximately $440 million in annualized sales. The deal was expected to close in early November, subject to working-capital adjustment, and was to be financed primarily with debt and existing cash. Sonoco subsequently issued $500 million of debentures—$250 million at 4.375% due 2021 and $250 million at 5.75% due 2040—with proceeds intended largely for the acquisition.
- Environmental contingencies include Fox River matters. Environmental accruals totaled $60.3 million at October 2, including $57.3 million related to U.S. Paper Mills. The company said the upper end of the possible loss range for certain Fox River claims may exceed that subsidiary’s net worth; Sonoco believes its additional consolidated exposure is limited to the subsidiary’s approximately $87 million equity value. Outcomes and ultimate losses are not presently estimable with certainty.
- Other risks cited include raw-material availability and pricing, demand and competitive pricing, economic conditions, pensions, foreign exchange and interest rates, acquisition integration, tax matters, environmental liabilities, and assumptions supporting goodwill valuations. No goodwill impairment was recorded; management identified Matrix Packaging and Flexible Packaging as comparatively more exposed if expected growth or margin improvements fail to materialize.
- Sonoco declared a regular quarterly dividend of $0.29 per share in October, payable in December. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether underlying margins and segment profitability improve as raw-material costs, pricing, mix, and productivity change.
- How much reported earnings growth depends on the one-time $18.8 million tax benefit; compare GAAP results with the company’s non-GAAP base measures.
- Cash generation after unusually large pension contributions, and the funding, integration, and leverage effects of the Tegrant acquisition and related $500 million debt issuance.
- Ultimate Fox River and other environmental liabilities, including the basis for Sonoco’s stated limit on consolidated exposure.
- Whether restructuring costs, goodwill assumptions, and management’s full-year cash-flow and capital-spending outlook are borne out.