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| SON > SEC Filings for SON > Form 10-Q on 1-Aug-2012 | All Recent SEC Filings |
1-Aug-2012
Quarterly Report
Statements included in this report that are not historical in nature, are intended to be, and are hereby identified as "forward-looking statements" for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended. The words "estimate," "project," "intend," "expect," "believe," "consider," "plan," "strategy," "opportunity," "target," "anticipate," "objective," "goal," "guidance," "outlook," "forecasts," "future," "will," "would," or the negative thereof, and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding offsetting high raw material costs; improved productivity and cost containment; adequacy of income tax provisions; refinancing of debt; realization of synergies resulting from acquisitions; adequacy of cash flows; anticipated amounts and uses of cash flows; effects of acquisitions and dispositions; adequacy of provisions for environmental liabilities; financial strategies and the results expected from them; sales growth; continued payments of dividends; stock repurchases; producing improvements in earnings; financial results for future periods; goodwill impairment charges; expected amounts of capital spending; anticipated contributions to benefit plans; and creation of long-term value for shareholders. Such forward-looking statements are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management. Such information includes, without limitation, discussions as to guidance and other estimates, expectations, beliefs, plans, strategies and objectives concerning our future financial and operating performance. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed or forecasted in such forward-looking statements. The risks and uncertainties include, without limitation:
• Availability and pricing of raw materials;
• Success of new product development and introduction;
• Ability to maintain or increase productivity levels and contain or reduce costs;
• Ability to manage the mix of business to take advantage of growing markets while reducing cyclical effects of some of the Company's existing business on operating results;
• International, national and local economic and market conditions;
• Availability of credit to us, our customers and/or our suppliers in needed amounts and/or on reasonable terms;
• Fluctuations in obligations and earnings of pension and postretirement benefit plans;
• Pricing pressures, demand for products, and ability to maintain market share;
• Continued strength of our paperboard-based tubes and cores and composite can operations;
• Anticipated results of restructuring activities;
• Resolution of income tax contingencies;
• Ability to successfully integrate newly acquired businesses into the Company's operations;
• Ability to win new business and/or identify and successfully close suitable acquisitions at the levels needed to meet growth targets;
• Rate of growth in foreign markets;
• Foreign currency, interest rate and commodity price risk and the effectiveness of related hedges;
• Actions of government agencies and changes in laws and regulations affecting the Company;
• Liability for and anticipated costs of environmental remediation actions;
• Accuracy of assumptions underlying projections related to goodwill impairment testing, and accuracy of management's assessment of goodwill impairment;
• Accuracy of assumptions underlying fair value measurements, accuracy of management's assessments of fair value, and fluctuations in fair value;
• Loss of consumer or investor confidence; and
• Economic disruptions resulting from terrorist activities.
The Company undertakes no obligation to publicly update or revise forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.
COMPANY OVERVIEW
Sonoco is a leading provider of consumer packaging, industrial products, protective packaging and packaging supply chain services, with approximately 345 locations in 34 countries.
Sonoco competes in multiple product categories, with its operations organized and reported in four segments: Consumer Packaging, Paper and Industrial Converted Products, Packaging Services, and Protective Packaging. The majority of the Company's revenues are from products and services sold to consumer and industrial products companies for use in the packaging of their products for sale or shipment. The Company also manufactures paperboard, primarily from recycled materials, for both internal use and open market sale. Each of the Company's operating units has its own sales staff and maintains direct sales relationships with its customers.
Second Quarter 2012 Compared with Second Quarter 2011
RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES
Measures calculated and presented in accordance with generally accepted accounting principles are referred to as GAAP financial measures. The following tables reconcile the Company's non-GAAP financial measures to their most directly comparable GAAP financial measures in the Company's Condensed Consolidated Statements of Income for each of the periods presented. These measures (referred to as "base") are the GAAP measures adjusted to exclude (dependent upon the applicable period) restructuring charges, asset impairment charges, acquisition charges, specifically identified tax adjustments and certain other items, if any, the exclusion of which the Company believes improves comparability and analysis of the underlying financial performance of the business.
For the three months ended July 1, 2012
Acquisition
Restructuring/ Related Costs
Dollars in thousands, except per Asset and Other
share data GAAP Impairment Adjustments Base
Income before interest and income
taxes $88,592 $9,396 98 $98,086
Interest expense, net 15,248 - - 15,248
Income before income taxes 73,344 9,396 98 82,838
Provision for income taxes 25,905 1,195 30 27,130
Income before equity in earnings of
affiliates 47,439 8,201 68 55,708
Equity in earnings of affiliates,
net of tax 3,912 22 - 3,934
Net income 51,351 8,223 68 59,642
Net loss attributable to
noncontrolling interests (28 ) 43 - 15
Net income attributable to Sonoco $51,323 $8,266 68 $59,657
Per diluted common share $0.50 $0.08 $0.00 $0.58
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SONOCO PRODUCTS COMPANY
For the three months ended July 3, 2011
Acquisition
Restructuring/ Related Costs
Dollars in thousands, except per Asset and Other
share data GAAP Impairment Adjustments Base
Income before interest and income
taxes $82,239 $9,578 $991 $92,808
Interest expense, net 8,174 - - 8,174
Income before income taxes 74,065 9,578 991 84,634
Provision for income taxes 23,775 2,903 320 26,998
Income before equity in earnings of
affiliates 50,290 6,675 671 57,636
Equity in earnings of affiliates,
net of tax 3,416 - - 3,416
Net income 53,706 6,675 671 61,052
Net (income)/loss attributable to
noncontrolling interests (298) 27 - (271)
Net income attributable to Sonoco $53,408 $6,702 $671 $60,781
Per diluted common share $0.52 $0.07 $0.01 $0.60
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RESULTS OF OPERATIONS
The following discussion provides a review of results for the three months ended July 1, 2012 versus the three months ended July 3, 2011.
OVERVIEW
Net sales for the second quarter of 2012 were $1,202 million, compared with $1,128 million in the same period in 2011. This 6.6% increase was due primarily to $118 million in sales from the Company's recently acquired Tegrant operations and higher selling prices in some businesses, partially offset by a negative impact from foreign currency translation. Tegrant was acquired November 8, 2011, and so is not included in the comparable prior year period.
Net income attributable to Sonoco for the second quarter of 2012 was $51.3 million compared to $53.4 million reported for the same period of 2011. Results for 2012 include a total of $8.3 million of after-tax restructuring and other non-base charges, while 2011 results were impacted by after-tax charges of $7.4 million. Second quarter 2012 base net income attributable to Sonoco (base earnings) was $59.7 million ($0.58 per diluted share) versus $60.8 million ($0.60 per diluted share) in 2011.
A combination of lower volume and unfavorable mix had a negative impact on earnings in most of the Company's businesses. In addition, a significantly stronger dollar further reduced reported earnings compared to the prior year quarter. Absent the impact of Tegrant, overall base operating profits would have been down over 4%, as the impact of volume and mix, along with higher pension and other costs, more than offset the benefits of positive price/cost and improved productivity. In Protective Packaging, operating profits in the legacy operations were up only modestly, but, operating profits in the segment including Tegrant more than tripled. Operating profits also increased in Consumer Packaging, but were down modestly in Paper and Industrial Converted Products, and down more than 50% in Packaging Services.
SONOCO PRODUCTS COMPANY
OPERATING REVENUE
Net sales for the second quarter of 2012 were $1,202 million, compared to
$1,128 million for the second quarter of 2011, an increase of 6.6%, or $74
million.
The components of the sales change were:
($ in millions)
Volume/mix $ (13)
Selling prices 3
Acquisitions/dispositions, net 124
Foreign currency translation and other, net (40)
Total sales increase $ 74
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Acquisition-related sales gains were almost exclusively driven by Tegrant and were partially offset by last year's sale of a small plastics business in Brazil. Sales prices were slightly higher for the Company overall as higher prices in the Consumer Packaging segment were largely offset by lower prices in Paper and Industrial Converted Products where sales prices were lower because of lower market prices for recovered paper, primarily old corrugated containers (OCC).
COSTS AND EXPENSES
Cost of sales were up $49.0 million from the prior year quarter; however, excluding the impact of acquisitions, cost of sales would have been down, in line with the decrease in sales absent acquisitions. Lower market pricing for recovered paper benefitted our industrial businesses, while Consumer Packaging was negatively impacted by higher film and other costs. Price/cost (the relationship of the change in sales prices to the change in costs of materials, energy and freight) was positive relative to the prior year, but the benefit was offset by largely higher labor, pension and other costs.
Acquisitions were responsible for almost all of the $19.3 million year-over-year increase in second quarter selling, general and administrative costs. Excluding acquisitions, these costs would have been only slightly higher, driven primarily by higher pension and general inflation. Base earnings before interest and income taxes were 8.2% of sales, virtually unchanged from last year's second quarter.
Restructuring and restructuring-related asset impairment charges totaled $9.4 million and $9.6 million for the second quarters of 2012 and 2011, respectively. Additional information regarding restructuring actions and impairments is provided in Note 4 to the Company's Condensed Consolidated Financial Statements.
Net interest expense for the second quarter of 2012 increased to $15.2 million, compared with $8.2 million during the same period in 2011. The increase was due to higher debt levels as a result of the acquisition of Tegrant.
This year's second quarter effective tax rate of 35.3% was higher than the 32.1% rate recorded in the second quarter of 2011. This increase is partially attributable to a portion of this year's foreign restructuring charges not being fully tax deductible in the local jurisdiction. The effective tax rate on base earnings for the quarter increased to 32.8% from 31.9% last year. The quarter-over-quarter increases in both the GAAP and base rates reflect a favorable accrual adjustment of approximately $1 million recorded in the prior year quarter.
REPORTABLE SEGMENTS
The following table recaps net sales for the second quarter of 2012 and 2011 ($
in thousands):
Three Months Ended
July 1, 2012 July 3, 2011 % Change
Net sales:
Consumer Packaging $ 477,038 $ 490,453 (2.7)%
Paper and Industrial Converted Products 475,460 485,170 (2.0)%
Packaging Services 107,801 125,934 (14.4)%
Protective Packaging 142,060 26,308 440.0%
Consolidated $ 1,202,359 $ 1,127,865 6.6%
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SONOCO PRODUCTS COMPANY
Consolidated operating profits, also referred to as "Income before interest and
income taxes" on the Company's Condensed Consolidated Statements of Income, are
comprised of the following ($ in thousands):
Three Months Ended
July 1, 2012 July 3, 2011 % Change
Income before interest and income
taxes:
Segment operating profit
Consumer Packaging $ 42,752 $ 40,200 6.3 %
Paper and Industrial Converted
Products 39,652 40,440 (1.9 )%
Packaging Services 4,029 8,722 (53.8 )%
Protective Packaging 11,653 3,446 238.2 %
Restructuring/Asset impairment charges (9,396 ) (9,578 )
Other, net (98 ) (991 )
Consolidated $ 88,592 $ 82,239 7.7 %
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The following table recaps restructuring/asset impairment charges attributable to each of the Company's segments during the second quarter of 2012 and 2011 ($ in thousands):
Three Months Ended
July 1, 2012 July 3, 2011
Restructuring/Asset impairment
charges:
Consumer Packaging $ 6,191 $ 10,389
Paper and Industrial Converted
Products 2,784 (1,213 )
Packaging Services (194 ) 402
Protective Packaging 615 -
Total $ 9,396 $ 9,578
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Segment operating profit is used by Company management to evaluate segment performance and does not include (dependent upon the applicable period) restructuring charges, asset impairment charges, acquisition-related costs, specifically identified tax adjustments and certain other items, if any, the exclusion of which the Company believes improves comparability and analysis of the underlying financial performance of the business. Accordingly, the term "segment operating profit" is defined as the segment's portion of "Income before interest and income taxes" excluding those items. All other general corporate expenses have been allocated as operating costs to each of the Company's reportable segments.
Consumer Packaging
Sonoco's Consumer Packaging segment includes the following products and services: round and shaped rigid containers and trays (both composite and thermoformed plastic); blow-molded plastic bottles and jars; extruded and injection-molded plastic products; printed flexible packaging; metal and peelable membrane ends and closures; and global brand artwork management.
This year's second quarter segment sales of $477 million were 2.7% lower than the $490 million reported in the prior year's quarter. Year-over-year sales were down slightly as lower volumes, primarily in the Company's composite cans and closures operations, and the unfavorable impact of foreign currency translation more than offset higher selling prices. Volume of blow molded plastics was up modestly, but was largely offset by lower market demand in the Company's other plastics businesses driven by reduced demand for dual-ovenable trays for the frozen food industry.
Segment operating profit was $42.8 million compared with $40.2 million in last year's second quarter. Operating profits were higher in the quarter due to a positive price/cost relationship and productivity improvements partially offset by negative volume and mix and higher pension, labor and other expenses.
Paper and Industrial Converted Products
The Paper and Industrial Converted Products segment includes the following products: high-performance paper and composite paperboard tubes and cores; fiber-based construction tubes and forms; wooden, metal and composite wire and cable reels and spools; and recycled paperboard, linerboard, corrugating medium, recovered paper and other recycled materials.
Second quarter 2012 sales for the segment were $475 million, compared with $485 million in the same period in 2011. The 2% year-over-year reduction in second quarter sales was primarily due to the negative impact of foreign currency translation and lower recovered paper prices. In North America, lower recovered paper prices led to lower selling prices in the Company's recycling and paper operations. Increased recycling activity in North America and Europe, additional trade sales of paper in North America, and improvement in the Company's reels business were partially offset by tube and core volume declines in most regions of the world.
Segment operating profit was $39.7 million in the second quarter compared to $40.4 million in the second quarter of 2011. Excluding the negative impact of exchange rates, operating profits would have been essentially unchanged as improvements in productivity and a positive price/cost relationship were offset by higher pension, labor and other costs.
Packaging Services
The Packaging Services segment includes the following products and services:
designing, manufacturing, assembling, packing and distributing temporary,
semipermanent and permanent point-of-purchase displays; supply chain management
services, including contract packing, fulfillment and scalable service centers;
and paper amenities, such as coasters and glass covers.
Second quarter 2012 sales for this segment were $108 million, compared with $126 million in the same period in 2011. A continued increase in fulfillment activity globally was more than offset by lower year-over-year pack center revenue associated with last year's loss of business with a major contract packaging customer and the negative impact of foreign currency translation.
Operating profit declined 54% to $4.0 million from $8.7 million in last year's quarter due primarily to lower volumes associated with the lost contract packaging customer. This loss of business was partially offset by increased retail merchandising and fulfillment business.
Protective Packaging
The Protective Packaging segment includes the following products:
custom-designed paperboard-based and expanded foam protective packaging;
temperature-assurance packaging; and retail security packaging.
Second quarter 2012 segment sales increased to $142 million, compared with $26 million in 2011. This increase was due entirely to last year's acquisition of Tegrant as sales in the Company's legacy protective packaging operations declined approximately 5% year-over-year due primarily to lower volume.
Segment operating profit increased to $11.7 million in the second quarter, compared to $3.4 million in the second quarter of 2011, primarily due to the acquisition of Tegrant. Operating profit from the Company's legacy protective packaging operations improved slightly due primarily to productivity improvements.
SONOCO PRODUCTS COMPANY
Six Months Ended July 1, 2012 Compared with Six Months Ended July 3, 2011
RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES
The following tables reconcile the Company's non-GAAP financial measures to
their most directly comparable GAAP financial measures for each of the periods
presented.
For the six months ended July 1, 2012
Acquisition
Restructuring/ Related Costs
Dollars in thousands, except per Asset and Other
share data GAAP Impairment Adjustments Base
Income before interest and income
taxes $167,435 $24,608 274 $192,317
Interest expense, net 30,669 - - 30,669
Income before income taxes 136,766 24,608 274 161,648
Provision for income taxes 47,802 5,786 98 53,686
Income before equity in earnings
of affiliates 88,964 18,822 176 107,962
Equity in earnings of affiliates,
net of tax 5,299 22 - 5,321
Net income 94,263 18,844 176 113,283
Net loss attributable to
noncontrolling interests 128 73 - 201
Net income attributable to Sonoco $94,391 $18,917 176 $113,484
Per diluted common share $0.92 $0.19 $0.00 $1.11
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For the six months ended July 3, 2011
Acquisition
Restructuring/ Related Costs
Dollars in thousands, except per Asset and Other
share data GAAP Impairment Adjustments Base
Income before interest and income
taxes $171,833 $11,895 $250 $183,978
Interest expense, net 16,911 - - 16,911
Income before income taxes 154,922 11,895 250 167,067
Provision for income taxes 48,959 3,639 84 52,682
Income before equity in earnings
of affiliates 105,963 8,256 166 114,385
Equity in earnings of affiliates,
net of tax 5,380 17 - 5,397
Net income 111,343 8,273 166 119,782
Net (income)/loss attributable to
noncontrolling interests (544 ) 70 - (474)
Net income attributable to Sonoco $110,799 $8,343 $166 $119,308
Per diluted common share $1.08 $0.09 $0.00 $1.17
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RESULTS OF OPERATIONS
The following discussion provides a review of results for the six months ended July 1, 2012 versus the six months ended July 3, 2011.
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