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SON > SEC Filings for SON > Form 10-Q on 31-Jul-2013All Recent SEC Filings

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Form 10-Q for SONOCO PRODUCTS CO


31-Jul-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 expenses associated with 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.


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, 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.

Second Quarter 2013 Compared with Second 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 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 June 30, 2013
                                                                        Restructuring/
                                                                             Asset                  Other
Dollars in thousands, except per share data           GAAP                Impairment             Adjustments          Base
Income before interest and income taxes            $    92,038         $           8,678        $          88       $ 100,804
Interest expense, net                                   14,407                        -                    -           14,407

Income before income taxes                              77,631                     8,678                   88          86,397
Provision for income taxes                              26,409                     2,913                   28          29,350

Income before equity in earnings of affiliates          51,222                     5,765                   60          57,047
Equity in earnings of affiliates, net of tax             3,824                        -                    -            3,824

Net income                                              55,046                     5,765                   60          60,871
Net (income)/loss attributable to
noncontrolling interests                                   (58 )                     (27 )                 -              (85 )

Net income attributable to Sonoco                  $    54,988         $           5,738                   60       $  60,786


Per diluted common share                           $      0.53         $            0.06        $        0.00       $    0.59


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                            SONOCO PRODUCTS COMPANY



                                                                  For the three months ended July 1, 2012
                                                                       Restructuring/
                                                                            Asset                 Other
Dollars in thousands, except per 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 (income)/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

RESULTS OF OPERATIONS

The following discussion provides a review of results for the three months ended June 30, 2013 versus the three months ended July 1, 2012.

OVERVIEW

Net sales for the second quarter of 2013 were $1,226 million, compared with $1,202 million in the same period last year. This 2.0% increase was almost exclusively driven by higher volume in Display and Packaging and Protective Solutions.

Net income attributable to Sonoco for the second quarter of 2013 was $55.0 million compared to $51.3 million reported for the same period of 2012. Results for 2013 and 2012 include after-tax restructuring and other non-base charges of $5.8 million and $8.3 million, respectively. Second quarter 2013 base net income attributable to Sonoco (base earnings) was $60.8 million ($0.59 per diluted share) versus $59.7 million ($0.58 per diluted share) in 2012.

In addition to increased revenue, current quarter earnings benefited from a slightly higher overall gross profit margin. A positive price / cost relationship (the relationship of the change in sales prices to the change in costs of materials, energy and freight) and productivity improvements added to gross profit, but were largely offset by higher maintenance, labor, pension and other expenses. The bulk of the year-over-year improvement in quarterly base earnings was driven by a 10.8% gain in Consumer Packaging operating profit and a 33.6% gain in Display and Packaging operating profit. These gains were partially offset by a 9.2% decline in Paper and Industrial Converted Products operating profit. A higher second quarter 2013 effective tax rate on base earnings was largely offset by lower net interest expense.

OPERATING REVENUE

Net sales for the second quarter of 2013 increased $24 million over the prior
year period.

The components of the sales change were:



               ($ in millions)
               Volume/mix                                    $ 30
               Selling prices                                  (3 )
               Foreign currency translation and other, net     (3 )

               Total sales increase                          $ 24


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SONOCO PRODUCTS COMPANY

COSTS AND EXPENSES

Cost of sales increased year-over-year largely in line with the increase in sales as gross profit margin improved slightly to 18.1% from 18.0% in the prior year quarter. A positive price / cost relationship and productivity improvements benefitted gross margin, but were largely offset by higher maintenance, labor, pension and other expenses. Pension expense in the quarter included a $1.9 million settlement charge related to plan changes in Canada, most of which is included in cost of goods sold.

Second quarter selling, general and administrative costs increased at a slightly higher rate than sales, reflecting normal labor rate increases, general inflation, and higher pension expense, including a portion of the Canadian pension plan settlement charge. Base earnings before interest and income taxes were up nearly 3 percent, and as a percentage of sales improved slightly from the prior year quarter.

Restructuring and restructuring-related asset impairment charges totaled $8.7 million and $9.4 million for the second quarters of 2013 and 2012, 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 2013 decreased to $14.4 million, compared with $15.2 million during the same period in 2012. The decrease was due to lower debt levels resulting from 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 second quarter of 2013 was 34.0 percent, compared with 35.3 percent and 32.8 percent, respectively, for the same period in 2012. The year-over-year variances in the second quarter effective tax rates reflect a greater proportion of current year income having been earned in higher tax jurisdictions and a more favorable mix in the rates applicable to this year's restructuring expenses.

REPORTABLE SEGMENTS

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



                                                        Three Months Ended
                                             June 30,         July 1,
                                               2013            2012          % Change
  Net sales:
  Consumer Packaging                        $   475,013     $   477,038           (0.4 )%
  Paper and Industrial Converted Products       473,217         475,460           (0.5 )%
  Display and Packaging                         128,790         107,081           19.5 %
  Protective Solutions                          149,236         142,060            5.1 %

  Consolidated                              $ 1,226,526     $ 1,202,359            2.0 %

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
                                              June 30,       July 1,
                                                2013           2012         % Change
   Income before interest and income taxes:
   Segment operating profit
   Consumer Packaging                         $  47,366      $ 42,752            10.8 %
   Paper and Industrial Converted Products       35,991        39,652            (9.2 )%
   Display and Packaging                          5,383         4,029            33.6 %
   Protective Solutions                          12,064        11,653             3.5 %
   Restructuring/Asset impairment charges        (8,678 )      (9,396 )          (7.6 )%
   Other, net                                       (88 )         (98 )         (10.2 )%

   Consolidated                               $  92,038      $ 88,592             3.9 %


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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 second quarter of 2013 and 2012 ($
in thousands):



                                                      Three Months Ended
                                                    June 30,       July 1,
                                                      2013           2012
         Restructuring/Asset impairment charges:
         Consumer Packaging                        $    6,192      $  6,191
         Paper and Industrial Converted Products        1,304         2,784
         Display and Packaging                             87          (194 )
         Protective Solutions                           1,095           615

         Total                                     $    8,678      $  9,396

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 second quarter segment sales of $475 million were 0.4% lower than the $477 million reported in the prior year's quarter. Volume was essentially flat compared with last year's second quarter as volume increases in composite cans, flexible packaging, and blow-molded plastics were offset by declines in metal ends and injection-molded and thermoformed plastics, including continued declines in dual-ovenable trays. The Company is continuing to pursue identified new opportunities in both thermoformed and blow-molded plastics, which, if successful, would improve volume and reduce the risk of goodwill impairment in these units.

Segment operating profit was $47.4 million compared with $42.8 million in last year's second quarter. Operating profits were higher in the quarter due to a positive price/cost relationship and productivity improvements, which were partially offset by higher pension, labor and other expenses and operating issues in the Company's blow molding unit. Second quarter operating profit in blow molding was negatively impacted by an isolated quality issue that arose in the first quarter as well as unrelated unplanned downtime in several plants.

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 2013 sales for the segment were $473 million, compared with $475 million in the same period in 2012. Volume was up across most of the segment, but, in total, was essentially flat due to the first-quarter closure of the Company's recycled fiber trading operations in Europe and lower demand for reels. Selling prices had a negative impact on revenue, as lower recovered paper prices led to lower selling prices in the Company's North American recycling, paper and tubes and cores operations.

Segment operating profit declined to $36.0 million in the second quarter compared to $39.7 million in the prior year as a positive price/cost relationship and productivity gains were more than offset by higher maintenance, labor, pension and other costs. Pension expense included a $1.9 million settlement charge related to plan changes in Canada.


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SONOCO PRODUCTS COMPANY

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.

Second quarter 2013 sales for this segment rose to $129 million, compared with $108 million in the same period in 2012, due to volume growth in international contract packaging and U.S. display and packaging services.

Operating profit increased 34% to $5.4 million from $4.0 million in last year's quarter due to volume growth, which was partially 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.

Second quarter 2013 segment sales increased to $149 million, compared with $142 million in 2012. This increase was driven by higher volume throughout the segment, but primarily in the foam-based business, driven by auto components, and the paper-based legacy business due to strength in the appliance market. These gains were partially offset by the divestiture of a small box plant.

Segment operating profit increased to $12.1 million in the second quarter, compared to $11.7 million last year, due to productivity improvements, volume growth and a slightly positive price/ cost relationship, partially offset by a negative mix of business and higher labor and other operating costs.

Six Months Ended June 30, 2013 Compared with Six Months Ended July 1, 2012

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 June 30, 2013
                                                                     Restructuring/
                                                                          Asset                  Other
Dollars in thousands, except per share data          GAAP              Impairment            Adjustments(1)          Base
Income before interest and income taxes           $   173,454        $        12,967        $            954       $ 187,375
Interest expense, net                                  28,675                     -                       -           28,675

Income before income taxes                            144,779                 12,967                     954         158,700
Provision for income taxes                             47,661                  4,196                     323          52,180

Income before equity in earnings of
affiliates                                             97,118                  8,771                     631         106,520
Equity in earnings of affiliates, net of tax            5,721                     -                       -            5,721

Net income                                            102,839                  8,771                     631         112,241
Net (income)/ loss attributable to
noncontrolling interests                                  288                    (54 )                    -              234

Net income attributable to Sonoco                 $   103,127        $         8,717                     631       $ 112,475


Per diluted common share                          $      1.00        $          0.08        $           0.01       $    1.09

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


Table of Contents

                            SONOCO PRODUCTS COMPANY



                                                                      For the six months ended July 1, 2012
                                                                         Restructuring/
                                                                              Asset                Other
Dollars in thousands, except per 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

RESULTS OF OPERATIONS

The following discussion provides a review of results for the six months ended June 30, 2013 versus the six months ended July 1, 2012.

OVERVIEW

Net sales for the first half of 2013 were $2,405 million, relatively flat compared with $2,415 million in the same period in 2012. Overall, volume was essentially unchanged as increases in Display and Packaging and Protective Solutions were offset by decreases in Consumer Packaging and Paper and Industrial Converted Products. Sales prices were mixed, but down overall, primarily due to lower market prices for recovered paper.

Net income attributable to Sonoco for the first half of 2013 was $103.1 million compared to $94.4 million reported for the same period of 2012. Results for 2013 . . .

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