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SON > SEC Filings for SON > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for SONOCO PRODUCTS CO

Form 10-K for SONOCO PRODUCTS CO


3-Mar-2014

Annual Report


Item 7. Management's discussion and analysis of financial condition and results
of operations

General overview

Sonoco is a leading manufacturer of consumer and industrial packaging products and provider of packaging services with 335 locations in 33 countries. The Company's operations are organized, managed and reported in four segments, Consumer Packaging, Paper and Industrial Converted Products, Protective Solutions and Display and Packaging. Generally, the Company serves two broad end-use markets, consumer and industrial, which, period to period, can exhibit different economic characteristics from each other. Geographically, approximately 67% of sales are generated in the United States, 16% in Europe, 6% in Canada and 11% in other regions.

Beginning in the fourth quarter of 2012, the Company changed the names of two of its segments. The segment previously referred to as Protective Packaging is now called Protective Solutions and the segment previously referred to as Packaging Services is now called Display and Packaging. There were no changes in the composition of either segment.

The Company is a market-share leader in many of its product lines, particularly in tubes, cores and composite containers. Competition in most of the Company's businesses is intense. Demand for the Company's products and services is primarily driven by the overall level of consumer consumption of non-durable goods; however, certain product and service groups are tied more directly to durable goods, such as appliances and construction. The businesses that supply and/or service consumer product companies tend to be, on a relative basis, more recession resistant than those that service industrial markets.

Financially, the Company's objective is to deliver average annual double-digit total returns to shareholders over time. To meet that target, the Company focuses on three major areas: driving profitable sales growth, improving margins and leveraging the Company's strong cash flow and financial position. Operationally, the Company's goal is to be the acknowledged leader in high-quality, innovative, value-creating packaging solutions within targeted customer market segments.

Over the next three to four years, the Company aspires to grow sales to between $5.5 and $6.0 billion, increase base earnings per share annually by 8% to 10% and increase return on net assets employed to 11%, or more. Achieving these goals will be difficult in the current low-growth environment. The Company's expected growth drivers continue to be organic sales growth, including new product sales, expansion in emerging international markets and strategic acquisitions.

The Company's plan to improve margins focuses on leveraging fixed costs, improving productivity, and maintaining a positive price/cost relationship (raising selling prices at least enough to recover inflation in material, energy and freight costs).

Use of Non-GAAP financial measures

To assess and communicate the financial performance of the Company, Sonoco management uses, both internally and externally, certain financial performance measures that are not in conformance with generally accepted accounting principles ("non-GAAP" financial measures). These non-GAAP financial measures reflect the Company's GAAP operating results adjusted to remove amounts relating to restructuring initiatives, asset impairment charges, environmental charges, acquisition-related costs, excess property insurance recoveries, and certain other items, if any, the exclusion of which management believes improves the period-to-period comparability and analysis of the underlying financial performance of the business. The adjusted non-GAAP results are identified using the term "base," for example, "base earnings."

The Company's base financial performance measures are not in accordance with, nor an alternative for, measures conforming to generally accepted accounting principles and may be different from non-GAAP measures used by other companies. The Company uses the non-GAAP "base" performance measures presented herein for internal planning and forecasting purposes, to evaluate its ongoing operations, and to evaluate the ultimate performance of management and each business unit against plan/forecast.

Reconciliations of GAAP to base results are presented on pages 21 and 22 in conjunction with management's discussion and analysis of the Company's results of operations. Whenever reviewing a non-GAAP financial measure, readers are encouraged to review the related reconciliation to fully understand how it differs from the related GAAP measure.

2013 overview and 2014 outlook

Sonoco delivered on many of its financial and operational commitments in 2013, while launching an effort to re-envision the Company to achieve future accelerated growth. The Company delivered record sales, gross profits and cash flow from operations in 2013, while free cash flow more than doubled. (Free cash flow is defined as cash flow from operations minus net capital expenditures and cash dividends. Net capital expenditures is defined as capital expenditures minus proceeds from the disposal of capital assets.)

Despite economic weakness in Europe, slowing emerging markets and higher pension and other operating costs, Sonoco's base earnings grew nearly 5 percent and we were able to significantly improve our balance sheet by reducing debt along with pension and post-retirement liabilities. Also during the year, we began to strategically align our diversified organization to facilitate the design and delivery of 360-degree Customized Solutions™ to our customers. The intent of this strategy is to grow the business by leveraging the Company's broad range of capabilities in conceptualization, design, creation, testing, prototyping, manufacturing, supply chain integration, marketing, graphics management and sustainability services and support to provide customers the ability, in one stop, to efficiently construct a complete solution that best fits their needs.

Key expectations for 2013 were that overall volumes would increase by around 1.5%, price/cost would be relatively flat, and productivity would improve and more than offset inflation in labor and other costs. Companywide volume was up in line with expectations while an overall positive price/cost relationship was offset by inflation exceeding moderately strong productivity gains. Consolidated gross profit margin increased 40 basis points in 2013 to 18.0%, reflecting the improved productivity and positive price/cost relationship.

Pension and postretirement benefit expenses were significantly higher in 2013. The aggregate unfunded position of the Company's various defined benefit plans decreased from $479 million at December 31, 2012, to $270 million at the end of 2013. This decrease was largely driven by the impact of higher discount rates and better than assumed returns on plan assets. In addition, contributions totaling $42 million were made to the plans in 2013.


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In late 2012, the Company initiated the repatriation of approximately $260 million of accumulated offshore cash which was received in the first quarter of 2013 and used to pay down outstanding debt.

The effective tax rate on base earnings ended the year two percentage points lower than expectations and one point lower than the prior year; however, the rate on GAAP earnings was more than 4 points lower than 2012, primarily due to tax expense recorded last year in connection with the repatriation of accumulated offshore cash.

The Company generated $538 million in cash from operations during 2013, compared with $404 million in 2012. The majority of the year-over-year increase is attributable to higher earnings, lower pension contributions, lower income tax payments, and a reduction in the amount of cash used to fund working capital.

Outlook

Entering 2014, the Company continues to be cautious regarding the future pace and sustainability of the global economic recovery. Accordingly, management is focused on selectively pursuing opportunities to grow its businesses, optimizing operations and developing cost-management contingency plans in the event business should unexpectedly weaken. The majority of the Company's targeted growth projects fall within its Consumer Packaging and Protective Solutions segments or emerging markets.

Management expects 2014 overall volume to increase approximately 2%, reflecting its assumption that the economic recovery will continue at a modest pace. However, volume in the Protective Solutions segment is expected to increase more than 5% driven largely by new and expanded business in the automotive and life science markets. Price/cost is expected to be relatively flat with average prices paid for recovered paper expected to increase approximately 9% and steel tinplate approximately 3%. Prices for plastic resins and film are projected to be largely unchanged and up slightly for energy and freight. Manufacturing productivity is expected to be strong enough to more than offset inflation in labor and other costs. As a result, management expects to see moderate improvements in overall gross profit and base EBIT margins.

Management's outlook for 2014 reflects a $16 million decrease in pension and postretirement benefit plan expenses due largely to the strong 2013 return on plan assets and lower discount rates. Total contributions to the Company's domestic and international pension and postretirement plans are expected to be approximately $67 million.

The consolidated effective tax rate on base earnings is expected to be approximately 34% in 2014 compared with 31.2% in 2013.

Acquisitions and joint ventures

The Company completed three acquisitions during 2013 at an aggregate cost of $4.0 million in cash. These acquisitions consisted of Imagelinx, a global brand artwork management business in the United Kingdom, a small tube and core business in Australia, and a small recycling broker in the United States. The all-cash purchase price of Imagelinx, including the cost of paying off various obligations, was $3.0 million. The aggregate all-cash purchase prices for the other businesses was $1.0 million. Also during 2013, the Company purchased a minority ownership in a small paper recycling business in Finland. The all cash cost of this investment was $3.6 million.

On November 8, 2011, the Company completed the acquisition of the privately held Tegrant Holding Corp. ("Tegrant"), a leading provider of highly engineered protective, temperature-assured and retail security packaging solutions. The cost of the Tegrant acquisition was $550.0 million in cash paid at the time of the purchase plus an additional $0.5 million paid in February 2012 for changes in working capital levels to the date of the closing. Tegrant, headquartered in DeKalb, Illinois, operates more than 30 manufacturing, design and testing facilities in the United States, Mexico and Ireland and employs more than 2,000 persons. Tegrant operates three strategic business units. ProtexicTM Brands, the largest business unit, is a manufacturer of molded expanded foam serving a number of industries including high technology, consumer electronics, automotive, appliances and medical devices. Tegrant's Thermosafe® Brands unit is a leading provider of temperature-assured solutions, primarily used in packaging temperature-sensitive pharmaceuticals and food. Tegrant's Alloyd Brands® business unit is a leading manufacturer and designer of high-visibility packaging, printed products, sealing equipment, and tooling for retail and medical markets. The acquisition was funded with proceeds from the issuance of senior unsecured debentures and a portion of the proceeds from a three-year term loan.

Also during 2011, the Company completed the acquisitions of several small tube and core businesses in New Zealand and Australia at a total cost of $7.2 million in cash, a rigid paperboard containers business in the United Kingdom at a cost of $4.7 million in cash, and a recycling business in Greenville, South Carolina, at a cost of $5.0 million in cash.

The Company has accounted for these acquisitions as purchases and, accordingly, has included their results of operations in the Company's consolidated statements of net income from the respective dates of acquisition.

See Note 3 to the Consolidated Financial Statements for further information about acquisition activities.

FORM 10-K SONOCO 2013 ANNUAL REPORT 19


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Restructuring and asset impairment charges

Due to its geographic footprint (335 locations in 33 countries) and the cost-competitive nature of its businesses, the Company is constantly seeking the most cost-effective means and structure to serve its customers and to respond to fundamental changes in its markets. As such, restructuring costs have been and are expected to be a recurring component of the Company's operating costs. The amount of these costs can vary significantly from year to year depending upon the scope and location of the restructuring activities.

The following table recaps the impact of restructuring and asset impairment charges on the Company's net income for the periods presented (dollars in thousands):

                                                            Year Ended December 31
                                                   2013              2012              2011
Exit costs:
2013 Actions                                     $ 11,572          $      -          $       -
2012 Actions                                        1,790            18,195                  -
2011 and Earlier Actions                            3,438             6,236             24,308
Asset impairments:                                  8,238             8,427             12,518
Total restructuring/asset impairment
charges                                          $ 25,038          $ 32,858          $  36,826
Income tax benefit                                 (6,774 )          (9,836 )          (11,506 )
Equity method investments, net of tax                   -                22                 17
Impact of noncontrolling interests, net
of tax                                                  2               116                200
Total impact of restructuring/asset
impairment charges, net of tax                   $ 18,266          $ 23,160          $  25,537

During 2013, the Company announced the planned closures of a thermoforming operation in Ireland, a rigid paper packaging plant in the United States, a small tube and core operation in Europe, and a fulfillment service center in the United States. The Company also sold a small corrugated box operation in the United States and realigned its cost structure resulting in the elimination of approximately 120 positions.

During 2012, the Company announced the closures of a paper mill in Germany and a paperboard-based protective packaging operation in the United States. In addition, the Company continued its manufacturing rationalization efforts in its blow-molding businesses, including the previously announced closure of a facility in Canada, and realigned its cost structure resulting in the elimination of approximately 165 positions.

During 2011, the Company announced the closures of a flexible packaging facility in Canada, a thermoformed plastic packaging facility in Canada, a tube and core facility in France, and both a fulfillment service center and a point-of-purchase display manufacturing facility in the United States. The Company also sold two small businesses, a plastics operation in Brazil and a tubes and cores operation in the United States, and realigned its fixed cost structure resulting in the elimination of approximately 160 positions.

The Company expects to recognize future additional costs totaling approximately $2.9 million in connection with previously announced restructuring actions. The Company believes that the majority of these charges will be incurred and paid by the end of 2014. As noted above, the Company regularly evaluates its cost structure, including its manufacturing capacity, and additional restructuring actions may be undertaken. Restructuring and asset impairment charges are subject to significant fluctuations from period to period due to the varying levels of restructuring activity and the inherent imprecision in the estimates used to recognize the impairment of assets and the wide variety of costs and taxes associated with severance and termination benefits in the countries in which the Company operates.

See Note 4 to the Consolidated Financial Statements for further information about restructuring activities and asset impairment charges.


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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 years presented:

                                                             For the year ended December 31, 2013
Dollars and shares in                                Restructuring/        Acquisition         Tax Related
thousands, except per share                              Asset               Related           Adjustments
data                                 GAAP              Impairment              Cost            & Other(1)            Base
Income before interest and
income taxes                       $ 361,295          $      25,038          $     484          $     (703 )       $ 386,114
Interest expense, net                 56,726                      -                  -                   -            56,726
Income before income taxes         $ 304,569          $      25,038          $     484          $     (703 )       $ 329,388
Provision for income taxes            96,203                  6,774                139                (462 )         102,654
Income before equity in
earnings of affiliates             $ 208,366          $      18,264          $     345          $     (241 )       $ 226,734
Equity in earnings of
affiliates, net of tax                12,029                      -                  -                   -            12,029
Net income                         $ 220,395          $      18,264          $     345          $     (241 )       $ 238,763
Less: Net (income)/loss
attributable to
noncontrolling interests,
net of tax                            (1,282 )                    2                  -                   -            (1,280 )
Net income attributable to
Sonoco                             $ 219,113          $      18,266          $     345          $     (241 )       $ 237,483
Per diluted common share           $    2.12          $        0.18          $       -          $        -         $    2.30

(1) Consists primarily of excess property insurance settlement gains, partially offset by the impact of the February 2013 devaluation of the Venezuelan bolivar fuerte, and additional tax expense of $279 associated with the repatriation of cash completed in 2013.

                                                            For the year ended December 31, 2012
Dollars and shares in                                Restructuring/       Acquisition       Tax Related
thousands, except per share                              Asset              Related         Adjustments
data                                  GAAP             Impairment             Cost           & Other(2)          Base
Income before interest and
income taxes                        $ 347,059         $      32,858         $     311         $  (4,800 )      $ 375,428
Interest expense, net                  59,985                     -                 -                 -           59,985
Income before income taxes          $ 287,074         $      32,858         $     311         $  (4,800 )      $ 315,443
Provision for income taxes            103,759                 9,836                99           (12,302 )        101,392
Income before equity in
earnings of affiliates              $ 183,315         $      23,022         $     212         $   7,502        $ 214,051
Equity in earnings of
affiliates, net of tax                 12,805                    22                 -                 -           12,827
Net income                          $ 196,120         $      23,044         $     212         $   7,502        $ 226,878
Less: Net (income)/loss
attributable to noncontrolling
interests, net of tax                    (110 )                 116                 -                 -                6
Net income attributable to
Sonoco                              $ 196,010         $      23,160         $     212         $   7,502        $ 226,884
Per diluted common share            $    1.91         $        0.22         $       -         $    0.08        $    2.21

(2) Consists primarily of property insurance settlement gains totaling $4,800 pretax ($3,289 after tax) on a facility destroyed by fire in 2010 and a facility in Thailand damaged by a flood in 2011, and additional tax expense of $11,744 associated with a planned repatriation of cash.

                     FORM 10-K      SONOCO 2013 ANNUAL REPORT   21


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                                                           For the year ended December 31, 2011
Dollars and shares in                               Restructuring/       Acquisition       Tax Related
thousands, except per share                             Asset              Related         Adjustments
data                                 GAAP             Impairment             Cost           & Other(3)          Base
Income before interest and
income taxes                       $ 322,480         $      36,826         $  12,290         $  (4,953 )      $ 366,643
Interest expense, net                 38,074                     -                 -                 -           38,074
Income before income taxes         $ 284,406         $      36,826         $  12,290         $  (4,953 )      $ 328,569
Provision for income taxes            78,423                11,506             3,667            13,146          106,742
Income before equity in
earnings of affiliates             $ 205,983         $      25,320         $   8,623         $ (18,099 )      $ 221,827
Equity in earnings of
affiliates, net of tax                12,061                    17                 -                 -           12,078
Net income                         $ 218,044         $      25,337         $   8,623         $ (18,099 )      $ 233,905
Less: Net (income)/loss
attributable to
noncontrolling interests, net
of tax                                  (527 )                 200                 -                 -             (327 )
Net income attributable to
Sonoco                             $ 217,517         $      25,537         $   8,623         $ (18,099 )      $ 233,578
Per diluted common share           $    2.13         $        0.25         $    0.09         $   (0.18 )      $    2.29

(3) Consists of property insurance settlement gains on a facility destroyed by fire in 2010 totaling $4,953 pretax ($3,130 after tax) and reductions in tax expense from valuation allowance adjustments on deferred tax assets totaling $14,969.

Results of operations - 2013 versus 2012

For 2013, net income attributable to Sonoco was $219.1 million, compared with $196.0 million for 2012. Net income in 2013 was negatively impacted by after-tax restructuring and other charges of $18.4 million, net of gains from property sales and excess property insurance recoveries. In 2012, net income attributable to Sonoco was negatively impacted by after-tax restructuring and acquisition charges of $20.1 million, net of gains from property sales and excess property insurance recoveries, and net income tax charges of $10.8 million relating primarily to the repatriation of accumulated offshore cash.

Base earnings in 2013 were $237.5 million ($2.30 per diluted share), compared with $226.9 million ($2.21 per diluted share) in 2012. This 4.7% year-over-year increase was the result of productivity improvements, modest volume growth and a positive price/cost relationship, partially offset by higher labor, pension, maintenance and other costs.

The consolidated effective tax rate was 31.6%, compared with 36.1% in 2012 and the effective tax rate on base earnings was 31.2%, compared with 32.1% in 2012. The decrease in the GAAP rate was due primarily to a tax charge in 2012 associated with the repatriation of accumulated offshore cash.

Consolidated net sales for 2013 were $4.85 billion, a $62 million, or 1.3%, increase from 2012.

The components of the sales change were:

                      ($ in millions)
                      Volume/Mix                       $  68
                      Selling price                       30
                      Acquisitions/Divestitures           (7 )
                      Currency exchange rate/Other       (29 )
                      Total sales increase             $  62

Volume was up in nearly all of the Company's businesses outside of the Consumer Packaging segment. For the most part, price changes for the Company's products are driven by changes in the underlying product costs. Of the selling price gains, approximately 70% came in Paper and Industrial Converted Products, where prices increased in response to higher recovered paper prices. The majority of the remaining gains came in the Consumer Packaging segment, primarily reflecting contract price resets to pass through higher paper and tinplate steel costs, and, to a lesser extent, higher film and resin costs. Included in Other is a $31 million reduction due to the Company's decision to exit the recycled fiber trading business in Europe. Total domestic sales were $3.2 billion, up 2% from 2012 levels. International sales were $1.6 billion, essentially flat with 2012.

Costs and expenses/margins

Cost of sales was up $32.1 million, or 0.8%, from the prior year, which was less than the 1.3% increase in sales reflecting the benefits of higher volume and productivity gains as well as the ability in 2013 for most of our businesses to increase prices in line with or somewhat more than the increases in the direct costs of materials, energy and freight. Gross profit margins improved year over year to 18.0% from 17.6% in the prior year. Higher average market prices for recovered paper increased costs in our industrial businesses, while Consumer Packaging was negatively impacted by higher resin, tinplate steel and other costs. The benefits of positive price/cost and productivity improvements were partially offset by higher labor, pension and other costs.

In 2013, aggregate pension and postretirement expenses increased $9.1 million to $62.0 million, versus $52.9 million in 2012. Approximately 75% of these expenses are reflected in cost of sales, with the balance in selling, general and administrative expenses. The higher expense was primarily the result of higher actuarial loss amortization due to lower discount rates.

Selling, general and administrative expenses increased $23.5 million, or 5.1%, and were 10.0% of sales compared to 9.7% of sales in 2012. The increase as a percent of sales was driven primarily by higher incentive and pension costs with the total dollar increase also reflecting wage and general inflation and higher volume-driven costs such as commissions. Base earnings before interest and income taxes were 8.0% of sales in 2013 compared to 7.8% in 2012, driven by the improved gross profit margins discussed above.


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Restructuring and restructuring related asset impairment charges totaled $25.0 million and $32.9 million in 2013 and 2012, respectively. Additional information . . .

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