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SON > SEC Filings for SON > Form 10-Q on 1-May-2013All Recent SEC Filings

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Form 10-Q for SONOCO PRODUCTS CO


1-May-2013

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," "forecast," "future," "will," "would," "aspires," 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; market leadership; 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;

Accuracy in valuation of deferred tax assets;

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.


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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, Display and Packaging, and Protective Solutions. 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.

First Quarter 2013 Compared with First Quarter 2012

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-related 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 March 31, 2013
                                                                      Restructuring/
                                                                           Asset                    Other
Dollars in thousands, except per share data         GAAP                Impairment              Adjustments(1)           Base
Income before interest and income taxes          $    81,416         $           4,289                      866        $ 86,571
Interest expense, net                                 14,268                        -                        -           14,268

Income before income taxes                            67,148                     4,289                      866          72,303
Provision for income taxes                            21,252                     1,283                      295          22,830

Income before equity in earnings of
affiliates                                            45,896                     3,006                      571          49,473
Equity in earnings of affiliates, net of
tax                                                    1,897                        -                        -            1,897

Net income                                            47,793                     3,006                      571          51,370
Net loss attributable to noncontrolling
interests                                                346                        27                       -              373

Net income attributable to Sonoco                $    48,139         $           3,033                      571        $ 51,743


Per diluted common share                         $      0.47         $            0.02         $           0.01        $   0.50

(1) Consists primarily of the impact of the February 2013 devaluation of the Venezuelan bolivar fuerte.


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                            SONOCO PRODUCTS COMPANY



                                                                     For the three months ended April 1, 2012
                                                                          Restructuring/
                                                                              Asset                 Other
Dollars in thousands, except per share data              GAAP               Impairment           Adjustments          Base
Income before interest and income taxes               $    78,843        $         15,212                 176       $ 94,231
Interest expense, net                                      15,421                      -                   -          15,421

Income before income taxes                                 63,422                  15,212                 176         78,810
Provision for income taxes                                 21,897                   4,591                  63         26,551

Income before equity in earnings of affiliates             41,525                  10,621                 113         52,259
Equity in earnings of affiliates, net of tax                1,387                      -                   -           1,387

Net income                                                 42,912                  10,621                 113         53,646
Net loss attributable to noncontrolling interests             156                      30                  -             186

Net income attributable to Sonoco                     $    43,068        $         10,651                 113       $ 53,832


Per diluted common share                              $      0.42        $           0.10       $        0.00       $   0.52

RESULTS OF OPERATIONS

The following discussion provides a review of results for the three months ended March 31, 2013 versus the three months ended April 1, 2012.

OVERVIEW

Net sales for the first quarter of 2013 were $1,179 million, compared with $1,212 million in the same period in 2012. This 2.7% decrease was primarily driven by lower volume and selling prices in certain businesses.

Net income attributable to Sonoco for the first quarter of 2013 was $48.1 million compared to $43.1 million reported for the same period of 2012. Results for 2013 and 2012 include after-tax restructuring and other non-base charges of $3.6 million and $10.8 million, respectively. First quarter 2013 base net income attributable to Sonoco (base earnings) was $51.7 million ($0.50 per diluted share) versus $53.8 million ($0.52 per diluted share) in 2012.

Current quarter earnings were negatively impacted by lower volume in Consumer Packaging and in Paper and Industrial Converted Products together with higher maintenance, labor, pension and other expenses. Productivity improvements and a positive price/cost relationship partially offset these negative factors. The bulk of the year-over-year shortfall in quarterly earnings was driven by a 15% decline in Consumer Packaging operating profit. Small earnings declines in Paper and Industrial Converted Products and in Display and Packaging were offset by a pick up in the Protective Solutions segment. A lower first quarter 2013 effective tax rate and a decrease in net interest expense partially offset the decline in operating profit.

OPERATING REVENUE

Net sales for the first quarter of 2013 were $1,179 million, compared to
$1,212 million for the first quarter of 2012, a decrease of 2.7%, or $33
million.

The components of the sales change were:



               ($ in millions)
               Volume/mix                                    $ (25 )
               Selling prices                                   (4 )
               Foreign currency translation and other, net      (4 )

               Total sales decrease                          $ (33 )


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SONOCO PRODUCTS COMPANY

COSTS AND EXPENSES

Cost of sales declined year-over-year on lower volume, but increased as a percentage of sales by 0.4%. Improved productivity was able to offset most of the impact of higher maintenance, labor, pension and other costs while price / cost (the relationship of the change in sales prices to the costs of materials, energy and freight) was essentially flat.

First quarter selling, general and administrative costs declined in line with sales largely due to lower incentive compensation costs more than offsetting normal labor rate increases, higher pension expense and general inflation.

Base earnings before interest and income taxes were 7.3% of sales compared to 7.8% in last year's first quarter, reflecting the decline in overall gross profit margin.

Restructuring and restructuring-related asset impairment charges totaled $4.3 million and $15.2 million for the first quarters of 2013 and 2012, respectively. The current quarter also included a loss of $0.9 million from the February devaluation of the Venezuelan bolivar fuerte. 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 first quarter of 2013 decreased to $14.3 million, compared with $15.4 million during the same period in 2012. The decrease was due to lower debt levels, primarily as a result of the repatriation of accumulated offshore cash that was used to pay down debt.

The effective tax rate on both GAAP and base earnings for the first quarter of 2013 was 31.6 percent, compared with 34.5 percent and 33.7 percent, respectively, for the same period in 2012. In each case, the lower rate is largely attributable to year-over-year discrete changes in the accrual for uncertain tax positions. The current quarter's effective rate on base earnings is lower than is expected for the entire year due to discrete items included in the current period.

REPORTABLE SEGMENTS

The following table recaps net sales for the first quarters of 2013 and 2012 ($
in thousands):



                                                        Three Months Ended
                                             March 31,       April 1,
                                               2013            2012          % Change
  Net sales:
  Consumer Packaging                        $   463,300     $   495,766           (6.5 )%
  Paper and Industrial Converted Products       454,207         463,610           (2.0 )%
  Display and Packaging                         119,875         114,905            4.3 %
  Protective Solutions                          141,831         138,089            2.7 %

  Consolidated                              $ 1,179,213     $ 1,212,370           (2.7 )%

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
                                             March 31,       April 1,
                                               2013            2012          % Change
 Income before interest and income taxes:
 Segment operating profit
 Consumer Packaging                         $    42,340      $  50,080           (15.5 )%
 Paper and Industrial Converted Products         31,004         32,304            (4.0 )%
 Display and Packaging                            4,705          4,842            (2.8 )%
 Protective Solutions                             8,522          7,005            21.7 %
 Restructuring/Asset impairment charges          (4,289 )      (15,212 )         (71.8 )%
 Other, net                                        (866 )         (176 )         392.0 %

 Consolidated                               $    81,416      $  78,843             3.3 %


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                            SONOCO PRODUCTS COMPANY



The following table recaps restructuring/asset impairment charges attributable
to each of the Company's segments during the first quarter of 2013 and 2012 ($
in thousands):



                                                      Three Months Ended
                                                   March 31,       April 1,
                                                      2013           2012
         Restructuring/Asset impairment charges:
         Consumer Packaging                        $    1,243      $   4,803
         Paper and Industrial Converted Products        2,003          8,713
         Display and Packaging                              5            292
         Protective Solutions                           1,038          1,404

         Total                                     $    4,289      $  15,212

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; global brand artwork management; and metal and peelable membrane ends and closures.

This year's first quarter segment sales of $463.3 million were 6.5% lower than the $495.8 million reported in the prior year's first quarter. Year-over-year sales were down due to lower volume throughout the segment and lower sales prices, particularly in flexible packaging and plastics. The volume decline reflects softness in the European economy, negative churn, and market shrinkage in several packaging categories due to changes in customer preferences at both the retail and consumer levels, including continued declines in dual-ovenable trays and certain blowmolded plastic categories. The Company is continuing to pursue identified new opportunities in both thermoformed and blowmolded plastics, which, if successful, could stem these volume losses and reduce the risk of goodwill impairment. The segment also experienced some short-term production inefficiencies related to customer specification changes and isolated quality issues. Management believes these inefficiencies and quality issues have been resolved and, therefore, should not impact second quarter results.

Segment operating profit was $42.3 million compared with $50.1 million in last year's first quarter. Operating profits were lower in the quarter due to lower volume, a negative price/cost relationship, and higher pension, labor and other expenses, which were partially offset by modest productivity improvements. Operating profit was also negatively impacted by a $1.7 million LIFO inventory adjustment.

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.

First quarter 2013 sales for the segment were $454.2 million, compared with $463.6 million in the same period in 2012. The 2.0% year-over-year reduction in first quarter sales was primarily due to lower volume across much of the segment. A substantial amount of this reduction came as a result of a decision to close a recycled fiber trading office in Greece due to its small scale and low margins, a portion of which was offset by an increase in domestic recycling volume.


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SONOCO PRODUCTS COMPANY

Segment operating profit declined to $31.0 million in the first quarter compared to $32.3 million in the first quarter of 2012 as a positive price/cost relationship and modest productivity gains were more that offset by lower volume and higher maintenance, labor, pension and other costs.

Display and Packaging

The Display and Packaging 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.

First quarter 2013 sales for this segment rose to $119.9 million, compared with $114.9 million in the same period in 2012, primarily on volume increases in contract packing.

Operating profit declined slightly to $4.7 million from $4.8 million in last year's quarter as much of the volume increase was at low margins and was offset by higher labor and other costs.

Protective Solutions

The Protective Solutions segment includes the following products:
custom-engineered, paperboard-based and expanded foam protective packaging and components; temperature-assurance packaging; and retail security packaging.

First quarter 2013 segment sales increased to $141.8 million, compared with $138.1 million in 2012. This increase was driven by higher volume in the expanded foam and temperature-assurance businesses, partially offset by lower retail security packaging sales.

Segment operating profit increased to $8.5 million in the first quarter, compared to $7.0 million in the first quarter of 2012, primarily due to synergies and strong productivity gains together with the higher volume.

Financial Position, Liquidity and Capital Resources

The Company's financial position remained strong during the first quarter of 2013. Cash flows provided by operations totaled $136.3 million in the first quarter of 2013 compared with $97.5 million in the first quarter of 2012, an increase of $38.8 million. Lower pension and postretirement plan contributions accounted for approximately $35.0 million of the increase. Trade accounts receivable levels increased in both the three month periods ended March 31, 2013 and April 1, 2012, reflecting higher levels of business activity; however, the magnitude of the increase was lower in 2013 resulting in a year-over-year improvement in operating cash flow of $17.7 million. Inventories used cash of $15.5 million in the first quarter of 2013 compared to using $10.0 million in the same period last year as inventory levels were built up in both years following a normal slowdown associated with the Christmas holidays. Trade accounts payable provided $44.0 million of cash in the first quarter of 2013 compared with $43.8 million in the first quarter of 2012. Accrued expenses used $10.3 million of cash in the first quarter of 2013 compared to providing $1.3 million in the first quarter of 2012 for a year-over-year reduction in operating cash flow of $11.6 million. This change consists primarily of higher year-over-year incentive payouts and the timing of restructuring activity.

Cash used by investing activities was $58.9 million in the first quarter of 2013, compared with $43.7 million in the same period last year. The net increase of $15.2 million reflects higher capital spending in the current year due largely to ongoing construction work on a new biomass boiler at the Company's Hartsville manufacturing complex. Spending on this $75 million project is expected to be completed by the end of 2013. Proceeds from the sale of assets were lower year over year by $4.5 million as 2012 included approximately $4 million of insurance proceeds for a facility destroyed by fire in 2010. In addition, during the first quarter of 2013, the Company invested $3.6 million to acquire a 12% interest in a recycling and environmental services business in Finland. Capital spending is expected to be approximately $155 million during the remainder of 2013.

Cash used by financing activities totaled $283.3 million in the first quarter of 2013, compared with $58.5 million in the same period last year, an increased use of cash of $224.8 million. Outstanding debt was $1,114.6 million at March 31, 2013, reflecting net repayments of $258.3 million during the first quarter of 2013, while net repayments totaled $36.1 million during the same period last year. The Company repatriated approximately $254 million of cash from its foreign


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SONOCO PRODUCTS COMPANY

subsidiaries during the first quarter of 2013, using the proceeds to pay off the $135 million balance of a term loan entered into in November 2011 to fund the purchase of Tegrant Holding Corporation and the remainder to pay down commercial paper. During the first three months of 2013, the Company utilized cash to pay dividends of $30.3 million, an increase of $1.1 million over the same period last year.

The Company operates a $350 million commercial paper program, supported by a bank credit facility of the same amount committed through October 2017. Outstanding commercial paper totaled $23 million and $152 million at March 31, 2013 and December 31, 2012, respectively.

Cash and cash equivalents totaled $163.5 million and $373.1 million at March 31, 2013 and December 31, 2012, respectively. Of these totals, $130.0 million and $346.7 million, respectively, were held outside of the United States by the Company's foreign subsidiaries. Cash held outside of the United States is available to meet local liquidity needs, or for capital expenditures, acquisitions, and other offshore growth opportunities. Under current law, cash repatriated to the United States is subject to federal income taxes, less applicable foreign tax credits. In the first quarter of 2013, the Company repatriated $254 million of its offshore cash, utilizing it to pay down existing debt. The Company intends to repatriate an additional $6 million during the balance of 2013. The transactions to repatriate these funds were initiated in late 2012 and, accordingly, the Company recognized U.S. federal tax expense on these amounts in its 2012 financial statements. As the Company enjoys ample domestic liquidity through a combination of operating cash flow generation and access to bank and capital markets borrowings, it considers its remaining . . .

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