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SON > SEC Filings for SON > Form 10-Q on 1-Nov-2012All Recent SEC Filings

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Form 10-Q for SONOCO PRODUCTS CO


1-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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.


Table of Contents

SONOCO PRODUCTS COMPANY

COMPANY OVERVIEW

Sonoco is a leading provider of consumer packaging, industrial products, protective packaging and packaging supply chain services, with approximately 340 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.

Third Quarter 2012 Compared with Third 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 non-GAAP financial 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 September 30, 2012

                                                          Restructuring/
 Dollars in thousands, except per share                       Asset
data                                        GAAP            Impairment          Other(1)         Base

 Income before interest and income
taxes                                       $96,343             $(444)          $(3,177)         $92,722
 Interest expense, net                       14,852                 -                 -           14,852

 Income before income taxes                  81,491              (444)           (3,177)          77,870
 Provision for income taxes                  25,399               126            (1,135)          24,390

 Income before equity in earnings of
affiliates                                   56,092              (570)           (2,042)          53,480
 Equity in earnings of affiliates, net
of tax                                        2,937                 -                 -            2,937

 Net income                                  59,029              (570)           (2,042)          56,417
 Net (income)/loss attributable to
noncontrolling interests                       (193 )              31                 -             (162)

 Net income attributable to Sonoco          $58,836             $(539)          $(2,042)         $56,255


 Per diluted common share                     $0.57             $0.00            $(0.02)           $0.55

(1) "Other" consists primarily of excess insurance settlement gains.


Table of Contents

                            SONOCO PRODUCTS COMPANY





                                                    For the three months ended October 2, 2011

                                                        Restructuring/
 Dollars in thousands, except per                           Asset
share data                                 GAAP           Impairment           Other(2)         Base

 Income before interest and income
taxes                                      $84,768          $12,048              $1,743          $98,559
 Interest expense, net                       8,334                -                  -             8,334

 Income before income taxes                 76,434           12,048               1,743           90,225
 Provision for income taxes                  2,344            4,831              19,093           26,268

 Income before equity in earnings of
affiliates                                  74,090            7,217            (17,350)           63,957
 Equity in earnings of affiliates, net
of tax                                       3,083                -                  -             3,083

 Net income                                 77,173            7,217            (17,350)           67,040
 Net loss attributable to
noncontrolling interests                        30               78                  -               108

 Net income attributable to Sonoco         $77,203           $7,295           $(17,350)          $67,148


 Per diluted common share                    $0.76            $0.07             $(0.17)            $0.66

(2) "Other" consists primarily of acquisition-related costs and reductions in tax expense from valuation allowance adjustments on deferred tax assets.

RESULTS OF OPERATIONS

The following discussion provides a review of results for the three months ended September 30, 2012 versus the three months ended October 2, 2011.

OVERVIEW

Net sales for the third quarter of 2012 were $1,195 million, compared with $1,124 million in the same period in 2011. This 6.3% increase was driven by $120 million in acquisition related sales, almost all of which is attributable to Tegrant, partially offset by lower sales prices in certain businesses and 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 third quarter of 2012 was $58.8 million compared to $77.2 million reported for the same period of 2011. Results for 2012 include a net after-tax benefit of $2.6 million representing gains from the sale of facilities and insurance recoveries totaling $6.4 million, after tax, partially offset by after-tax restructuring and other non-base charges of $3.8 million. Results for 2011 include $8.8 million of after-tax restructuring and acquisition charges and a net $18.8 million income tax benefit from valuation allowance adjustments on deferred tax assets. Third quarter 2012 base net income attributable to Sonoco (base earnings) was $56.3 million ($0.55 per diluted share) versus $67.1 million ($0.66 per diluted share) in 2011.

A combination of unfavorable changes in mix of business and higher costs had a negative impact on earnings in most of the Company's businesses in the third quarter of 2012. In addition, a stronger dollar further reduced reported earnings compared to the prior year quarter. Absent the inclusion of Tegrant, overall base operating profits would have been down over 15%, as the impact of mix along with higher pension, labor, maintenance, 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 down 10%; however, including the addition of Tegrant, operating profits for the segment as a whole more than tripled. Operating profits also increased modestly in Packaging Services, but were down significantly in Consumer Packaging and Paper and Industrial Converted Products.


Table of Contents

                            SONOCO PRODUCTS COMPANY



OPERATING REVENUE

Net sales for the third quarter of 2012 were $1,195 million, compared to
$1,124 million for the third quarter of 2011, an increase of 6.3%, or $71
million.

The components of the sales change were:

 ($ in millions)

 Volume/mix                                    $    10
 Selling prices                                    (32)
 Acquisitions/dispositions, net                    120
 Foreign currency translation and other, net       (27)

 Total sales increase                          $    71

Acquisition-related sales gains were almost exclusively driven by Tegrant. The majority of the decline in sales due to selling prices occurred in the Company's recycling and paper operations and was driven by lower recovered paper prices.

COSTS AND EXPENSES

Cost of sales was up $51.9 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 benefitted from lower resin and film 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 more than offset by higher pension, labor, maintenance and other costs.

Acquisitions were the primary driver of the $20.4 million year-over-year increase in third quarter selling, general and administrative (SG&A) costs. Excluding acquisitions, these costs would have been $4.1 million higher, driven primarily by higher pension expense and general inflation. In addition, last year's third quarter included the benefit of $3 million of life insurance proceeds which were not repeated in the current year. Base earnings before interest and income taxes were 7.8% of sales compared to 8.8% in last year's third quarter, due to the increase in SG&A costs and the impact of acquisitions.

This year's third quarter reflects a net restructuring and restructuring-related asset benefit of $0.4 million related to gains on the sale of previously closed facilities, while last year's quarter included charges totaling $12.0 million. 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 third quarter of 2012 increased to $14.9 million, compared with $8.3 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 third quarter effective tax rate of 31.2% was higher than the 3.1% rate recorded in the third quarter of 2011. Last year's quarter reflects an $18.8 million net benefit from deferred tax valuation adjustments on foreign jurisdiction net operating losses. In addition, to a much lesser extent, the prior year's rate reflected the positive impact of non-taxable life insurance proceeds and the net release of reserves for uncertain tax positions. The effective tax rate on base earnings for the quarter increased to 31.3% from 29.1% last year. The quarter-over-quarter increase in the base rate reflects a decrease in non-taxable life insurance proceeds.


Table of Contents

                            SONOCO PRODUCTS COMPANY



REPORTABLE SEGMENTS

The following table recaps net sales for the third quarter of 2012 and 2011 ($
in thousands):



                                                          Three Months Ended
                                              Sept. 30, 2012                Oct. 2, 2011                % Change
Net sales:
Consumer Packaging                          $           475,946           $         503,370                 (5.4)%
Paper and Industrial Converted Products                 453,605                     484,066                 (6.3)%
Packaging Services                                      124,561                     112,939                10.3%
Protective Packaging                                    141,418                      23,796               494.3%

Consolidated                                $         1,195,530           $       1,124,171                 6.3%

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
                                              Sept. 30, 2012                Oct. 2, 2011                % Change
Income before interest and income
taxes:
Segment operating profit
Consumer Packaging                          $            43,829           $          52,363                  (16.3 )%
Paper and Industrial Converted Products                  33,150                      38,027                  (12.8 )%
Packaging Services                                        5,098                       4,807                    6.1 %
Protective Packaging                                     10,645                       3,362                  216.6 %
Restructuring/Asset impairment charges                      444                     (12,048 )
Other, net                                                3,177                      (1,743 )

Consolidated                                $            96,343           $          84,768                   13.7 %

The following table recaps restructuring/asset impairment charges attributable to each of the Company's segments during the third quarter of 2012 and 2011 ($ in thousands):

                                                          Three Months Ended
                                              Sept. 30, 2012                Oct. 2, 2011
Restructuring/Asset impairment charges:
Consumer Packaging                          $            (2,260 )         $           2,202
Paper and Industrial Converted Products                     899                       6,397
Packaging Services                                          239                       3,356
Protective Packaging                                        678                          86
Corporate                                                     -                           7

Total                                       $              (444 )         $          12,048

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.


Table of Contents

SONOCO PRODUCTS COMPANY

This year's third quarter segment sales of $476 million were 5.4% lower than the $503 million reported in the prior year's quarter. Year-over-year sales were down due to lower volumes, primarily in the Company's composite cans and closures operations, slightly lower sales prices, particularly in blow-molded plastics, and the unfavorable impact of foreign currency translation. Volume in the plastics businesses was down modestly, partially driven by reduced demand for dual-ovenable trays for the frozen food industry.

Segment operating profit was $43.8 million compared with $52.4 million in last year's third quarter. Operating profits were lower in the quarter due to negative volume and mix and higher pension, labor and other expenses, which were partially offset by a positive price/cost relationship and productivity improvements.

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.

Third quarter 2012 sales for the segment were $454 million, compared with $484 million in the same period in 2011. The 6.3% year-over-year reduction in third 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 $33.2 million in the third quarter compared to $38.0 million in the third quarter of 2011. Temporary operating problems experienced at several North American paperboard mills and the negative impact of exchange rates, higher pension, labor and other costs accounted for the majority of the year-over-year decline. The higher volume of trade sales of paper was offset by a lower volume of intercompany sales resulting in no significant increase in segment operating profit, while the additional recycling volume added very little to operating profit given the lower recovered paper prices. These negative factors were partially offset by modest productivity improvements and a favorable price/cost relationship. The paperboard mill operating problems noted above have been resolved and are not expected to negatively affect future operating profits.

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.

Third quarter 2012 sales for this segment were $124.6 million, compared with $112.9 million in the same period in 2011, as the segment experienced strong volume increases in point-of-purchase displays and contract packing. These volume gains were partially offset by negative impact of foreign exchange translation.

Operating profit improved 6.1% to $5.1 million from $4.8 million in last year's quarter due primarily to higher volumes in international packaging fulfillment centers and productivity improvements. These improvements were partially offset by a negative change in mix and the unfavorable effect of foreign exchange translation.

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.

Third quarter 2012 segment sales increased to $141 million, compared with $24 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 were flat year-over-year as modest volume increases were offset by lower selling prices.


Table of Contents

SONOCO PRODUCTS COMPANY

Segment operating profit increased to $10.6 million in the third quarter, compared to $3.4 million in the third quarter of 2011, primarily due to the acquisition of Tegrant. Operating profit from the Company's legacy protective packaging operations decreased slightly as negative price/cost relationships were mostly offset by improvements in volume. Within Tegrant, operations largely performed in line with expectations except for retail packaging where customer churn and lower consumer demand in our served markets resulted in lower than expected sales and operating profit.

Nine Months Ended September 30, 2012 Compared with Nine Months Ended October 2, 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 nine months ended September 30, 2012

                                                         Restructuring/
 Dollars in thousands, except per                            Asset
share data                                 GAAP            Impairment        Other(1)         Base

 Income before interest and income
taxes                                     $263,778               $24,164       $(2,903 )      $285,039
 Interest expense, net                      45,521                     -             -          45,521

 Income before income taxes                218,257                24,164        (2,903 )       239,518
 Provision for income taxes                 73,201                 5,912        (1,037 )        78,076

 Income before equity in earnings of
affiliates                                 145,056                18,252        (1,866 )       161,442
 Equity in earnings of affiliates,
net of tax                                   8,236                    22             -           8,258

 Net income                                153,292                18,274        (1,866 )       169,700
 Net (income)/loss attributable to
noncontrolling interests                       (65 )                 104             -              39

 Net income attributable to Sonoco        $153,227               $18,378       $(1,866 )      $169,739


 Per diluted common share                    $1.49                 $0.18        $(0.02 )         $1.65

(1) "Other" consists primarily of excess insurance settlement gains.

                                                     For the nine months ended October 2, 2011

                                                         Restructuring/
 Dollars in thousands, except per                            Asset
share data                                 GAAP            Impairment          Other(2)          Base

 Income before interest and income
. . .
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