Sonoco Products Company — 2013 Form 10-K
Business context and reporting period. Sonoco manufactures consumer and industrial packaging and provides packaging services, operating 335 locations in 33 countries. This filing covers the fiscal year ended December 31, 2013; it also reports unaudited fourth-quarter results. Sonoco reports four segments: Consumer Packaging, Paper and Industrial Converted Products, Display and Packaging, and Protective Solutions. The filing was signed March 3, 2014.
Key financial results
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $4.848 billion | $4.786 billion |
| Gross profit / margin | $873.5 million / 18.0% | $843.6 million / 17.6% |
| Operating income | $361.3 million | $347.1 million |
| Net income attributable to Sonoco | $219.1 million | $196.0 million |
| Diluted EPS | $2.12 | $1.91 |
| Base diluted EPS (non-GAAP) | $2.30 | $2.21 |
| Cash from operations | $538.0 million | $403.9 million |
| Capital spending | $172.4 million | $214.9 million |
| Total debt at year-end | $981.5 million | $1.373 billion |
| Cash and cash equivalents at year-end | $217.6 million | $373.1 million |
| Current ratio | 1.6 | 1.4 |
Net sales increased 1.3%. Gross margin rose 40 basis points. Management attributed higher base earnings to productivity, modest volume growth and positive price/cost, partly offset by labor, pension, maintenance and other costs. Base measures are non-GAAP and exclude specified items; they are not substitutes for GAAP results.
Fourth-quarter 2013 net sales were $1.215 billion and net income attributable to Sonoco was $54.7 million, or $0.53 diluted EPS. Fourth-quarter 2012 net sales were $1.176 billion and attributable net income was $42.8 million, or $0.42 diluted EPS.
Cash, debt and liquidity
Operating cash flow rose $134.1 million year over year, reflecting higher earnings, lower pension contributions and tax payments, and working-capital movements. Free cash flow, defined by Sonoco as operating cash flow less net capital expenditures and cash dividends, more than doubled; the filing does not provide a clear free-cash-flow amount in the presented text. Financing activities used $515.1 million, primarily for net debt repayment. Debt fell $391.6 million; the company used approximately $260 million of repatriated offshore cash to repay debt and repaid $118 million of 6.5% debentures at maturity. No commercial paper was outstanding at year-end; a $350 million commercial-paper program is backed by a committed credit facility through October 2017.
Sonoco paid $1.23 per share in 2013 dividends, up from $1.19 in 2012. The board had 4.87 million shares remaining under its repurchase authorization at year-end, and management intended to repurchase approximately 2 million shares in 2014. The company expected 2014 capital spending of approximately $185 million.
Segment performance
| Segment | 2013 sales | 2013 operating profit | Year-over-year change in profit |
|---|---|---|---|
| Consumer Packaging | $1.894 billion | $187.1 million | +5.9% |
| Paper and Industrial Converted Products | $1.859 billion | $138.1 million | -2.3% |
| Display and Packaging | $523.5 million | $23.6 million | +27.6% |
| Protective Solutions | $572.1 million | $37.3 million | -3.9% |
Consumer Packaging profit improved despite lower sales, supported by productivity, cost control and price/cost. Display and Packaging benefited from organic growth and a major new U.S. customer. Paper and Industrial Converted Products faced higher labor, pension and other costs. Protective Solutions sales grew, but unfavorable mix and cost inflation reduced profit.
Outlook, commentary and significant matters
- 2014 outlook: Management expected overall volume growth of approximately 2%, relatively flat price/cost, and moderate improvement in gross-profit and base EBIT margins. Recovered-paper prices were expected to rise approximately 9%, tinplate steel approximately 3%; management expected productivity to more than offset labor and other cost inflation. Protective Solutions volume was expected to grow more than 5%.
- Management forecast 2014 base earnings tax rate of approximately 34%, versus 31.2% in 2013, and approximately $67 million of pension and postretirement plan contributions. Pension and postretirement expense was expected to decline about $16 million.
- Over the next three to four years, management aspired to sales of $5.5–$6.0 billion, annual base EPS growth of 8%–10%, and return on net assets employed of at least 11%. The filing cautions that achieving these goals would be difficult in a low-growth environment.
- 2013 restructuring and asset impairment charges were $25.0 million; approximately $2.9 million of additional costs for announced actions were expected, mostly by the end of 2014. Further restructuring remained possible.
- Environmental liabilities were reserved at $73.0 million. For Fox River matters, $48.9 million was reserved for Operating Units 2–5, excluding the separate $3.2 million Site reserve. Sonoco stated that its maximum additional pretax exposure was essentially limited to U.S. Mills’ approximately $94 million equity position; outcomes, allocation and remediation costs remain uncertain, and appeals were pending.
- Goodwill and other intangible assets totaled more than $1.3 billion. No goodwill impairment was recorded in 2013, but management identified blowmolding and thermoforming as more exposed to future impairment if expected performance improvements fail to materialize.
- Other principal risks include commodity, energy and freight price volatility; inability to pass cost increases through; intense competition and customer concentration; global economic weakness, currency and international risks; pension funding and actuarial assumptions; acquisitions and restructuring execution; environmental regulation; and operational or IT disruptions. The five largest customers represented 63% of Display and Packaging sales; the largest customer represented about 7% of consolidated revenue.
Most important facts for investors to verify
- Whether 2014 volume, price/cost, productivity and base-margin assumptions were achieved, especially the expected growth in Protective Solutions.
- Cash-flow sustainability and the effect of working-capital swings, pension contributions and planned capital spending on debt reduction and dividends.
- Fox River litigation and remediation developments, including whether the reserve and stated exposure limits remain appropriate.
- Performance of the blowmolding and thermoforming reporting units and the customer renewal concentration in Display and Packaging, given goodwill balances and impairment sensitivity.
- Whether the company’s approximately $67 million expected 2014 benefit-plan contributions and higher expected base tax rate affected earnings or liquidity as anticipated.
The independent auditor reported that the consolidated financial statements were fairly presented under U.S. GAAP and that internal control over financial reporting was effective as of December 31, 2013.