SONOCO PRODUCTS CO annual report, FY2010

Sonoco Products Company — 2010 Form 10-K

Reporting period: Fiscal year ended December 31, 2010. The filing is an annual report, not a standalone fourth-quarter report; selected Q4 figures are included below. Sonoco manufactures consumer and industrial packaging and provides packaging services, operating 315 locations in 34 countries.

Financial performance and liquidity

MetricFY 2010FY 2009
Net sales$4.124 billion$3.597 billion
Gross profit / gross margin$767.5 million / 18.6%$666.0 million / 18.5%
Net income attributable to Sonoco$201.1 million; $1.96 diluted EPS$151.5 million; $1.50 diluted EPS
Management-defined base earnings$239.4 million; $2.34 diluted EPS$179.8 million; $1.78 diluted EPS
Cash from operations$375.1 million$391.0 million
Capital expenditures$145.9 million$104.2 million
Total debt$620.9 million$580.8 million
Cash and cash equivalents$158.2 million$185.2 million
Current ratio1.51.2

Sales increased 14.6%, driven by volume/mix (+$209 million), selling prices (+$142 million), acquisitions (+$77 million), corrugating-medium sales (+$66 million), and currency/other (+$33 million). Companywide volume rose approximately 6%. The effective tax rate was 25.3%, versus 31.2% in 2009.

Operating cash flow declined despite higher earnings, mainly because increased business activity absorbed cash in receivables and inventory. Investing cash outflow was $283.7 million, including $137.8 million for acquisitions; financing cash outflow was $116.6 million. Year-end working capital was $376.9 million. Debt to total capital was 29.2%, compared with 29.6%.

In Q4 2010, sales were $1.127 billion and net income attributable to Sonoco was $34.5 million, or $0.33 diluted EPS; Q4 2009 figures were $1.002 billion, $47.1 million, and $0.46, respectively.

Material changes and segment results

  • Tubes and Cores/Paper sales rose 22.8% to $1.645 billion and segment operating profit increased 80.1% to $130.2 million, reflecting recovery in volumes, higher selling prices and productivity. Higher recovered-paper costs, averaging about 140% above 2009, were only partly recovered through pricing.
  • Consumer Packaging sales increased 7.6% to $1.668 billion and segment operating profit rose 5.8% to $179.8 million. The APT acquisition, productivity and lower pension costs helped; unfavorable price/cost effects and higher labor, freight and energy costs offset some gains.
  • Packaging Services sales rose 10.0% to $469.1 million and operating profit rose 13.6% to $12.5 million. New international business offset customer losses, but replacement work carried lower margins.
  • All Other Sonoco sales increased 21.5% to $341.5 million and operating profit rose 57.6% to $41.6 million.

Sonoco reported a $48.6 million pretax loss on early debt extinguishment. It issued $350 million of 5.75% bonds due 2040, tendered $244.1 million face value of existing bonds for $293.3 million, and repaid $100 million of bonds at maturity. Restructuring and asset-impairment charges were $24.0 million pretax ($15.5 million after tax), including a $12.6 million impairment tied to a customer contract that will not be fully renewed. Four acquisitions were completed for a recorded cost of $138.3 million, principally APT.

Outlook, risks and contingencies

  • For 2011, management expected demand near recent-quarter levels and volume growth of 2%–4%; it anticipated recovering most late-2010 material cost increases, maintaining a neutral price/cost relationship, and further productivity gains. Expected 2011 capital spending was $140–$150 million and the effective tax rate approximately 31%.
  • Longer-term goals set in December 2010 included $5.5–$6.0 billion in sales by 2014, EBIT margins of 11% versus a stated current 9.4%, and return on net assets employed of 12.5% versus 11%. Growth plans rely on organic sales, international expansion and acquisitions; these are targets, not guarantees.
  • Environmental liabilities totaled approximately $62.0 million accrued. The Fox River matter is the largest identified exposure: U.S. Mills had a $55.5 million reserve for OUs 2–5, excluding the separate hotspot reserve. Estimated total project remediation costs ranged from $390 million to more than $600 million; Sonoco stated its consolidated exposure was effectively limited to U.S. Mills’ approximately $85 million equity value. Natural-resource damages were not reserved, and outcomes remain uncertain.
  • Sonoco faces a securities class action alleging misleading public statements during 2007; the company says it will defend the suit. The filing states that the ultimate outcome of some legal matters cannot be estimated clearly.
  • Defined benefit and postretirement plans were underfunded by approximately $334 million at year-end. The company made an $85 million U.S. pension contribution in January 2011 and expected total 2011 plan contributions of approximately $118 million.
  • Key operating risks include raw-material, energy and freight inflation; competitive pricing and customer contract losses; economic and foreign-exchange changes; acquisition and restructuring execution; pension assumptions; and environmental remediation. Procter & Gamble generated about 10% of 2010 revenue and 8% of year-end receivables. The five largest Packaging Services customers represented about 72% of segment sales.

Important facts for investors to verify

  • Reconcile GAAP net income and EPS with management’s non-GAAP “base” earnings and review the adjustments, especially debt-tender, restructuring and tax items.
  • Track whether volume growth and pricing recover raw-material, energy and freight inflation, particularly OCC costs.
  • Assess cash conversion and working-capital requirements as sales grow, alongside acquisition spending, dividends and share repurchases.
  • Monitor the Fox River litigation, remediation estimates, potential natural-resource damages and the stated limit on Sonoco’s consolidated exposure.
  • Review pension funding needs and the sensitivity of obligations and expense to discount rates and asset returns.
  • Test the 2011 outlook and 2014 goals against customer attrition, replacement-business margins, acquisitions and goodwill impairment risks.