Sonoco Products Company (NYSE: SON) — Q1 2023 Form 10-Q
Reporting period: Three months ended April 2, 2023; comparable period ended April 3, 2022. Unaudited results. Sonoco supplies consumer packaging, industrial products and protective packaging, with Consumer Packaging and Industrial Paper Packaging as its reportable segments.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $1,729.8m | $1,771.0m | -2.3% |
| Gross profit / margin | $374.4m / 21.6% | $371.6m / 21.0% | Margin +0.6 percentage points |
| Operating profit, GAAP | $229.6m | $169.1m | +35.8% |
| Net income attributable to Sonoco | $148.3m | $115.3m | +28.6% |
| Diluted EPS, GAAP | $1.50 | $1.17 | +$0.33 |
| Adjusted operating profit | $213.4m | $260.8m | -18.2% |
| Adjusted net income / diluted EPS | $137.6m / $1.40 | $182.7m / $1.85 | EPS down $0.45 |
| Adjusted EBITDA / margin | $276.3m / 16.0% | $317.5m / 17.9% | EBITDA -13.0% |
| Net cash from operations | $98.0m | $1.1m | +$96.9m |
Q1 2023 capital expenditures were $83.4m; operating cash flow less capital expenditures was approximately $14.6m. Net interest expense rose to $32.7m from $19.1m, reflecting higher average debt and variable-rate borrowing costs. The effective GAAP tax rate was 24.3%, versus 23.7%.
Material changes and segment performance
- Sales declined $41.2m: lower volume and mix (including acquisitions) and unfavorable foreign currency and other effects outweighed higher selling prices. Management cited strategic pricing and manufacturing productivity as earnings supports, but lower volume/mix and higher interest costs as offsets.
- Consumer Packaging sales rose 4.7% to $909.3m, while segment operating profit fell 47.1% to $91.8m. Management attributed the decline to higher-cost metal inventory flowing through results and softer demand in aerosols and rigid-plastic food packaging.
- Industrial Paper Packaging sales fell 11.9% to $615.9m, while segment operating profit rose 29.9% to $94.4m. Pricing and lower material costs more than offset volume and mix declines.
- All Other sales were nearly flat at $204.7m; segment operating profit increased 87.5% to $27.2m, with pricing and productivity cited as drivers.
GAAP operating profit included $72.0m of gains from the S3 business divestiture and timberland sale. Excluding disclosed adjustments, adjusted operating profit and adjusted earnings were lower year over year. Restructuring and asset impairment charges were $28.8m, up from $12.1m.
Cash, debt and liquidity
- Cash and equivalents were $209.7m at April 2, 2023, versus $227.4m at year-end 2022. Total reported notes payable/current debt and long-term debt were approximately $3,165.5m; the filing reports long-term debt at a fair value of $2,551.6m versus a carrying amount of $2,717.9m.
- Approximately $448m of debt maturities were scheduled over the next 12 months, including $12m of commercial paper. The $750m revolving facility, committed through June 2026, had $738m available after commercial paper. Management said cash, borrowing capacity and expected cash flows were sufficient for maturities and other needs.
- Financing activities used $118.2m, including $84.2m of debt repayments and $47.7m of dividends. The quarterly dividend was $0.49 per share; a subsequent $0.51 dividend was declared for payment in June 2023.
- Net capital spending for 2023 was expected to be approximately $305m. Management expected approximately $10m of additional pension and postretirement contributions for the rest of 2023.
Outlook, unusual items and risks
- The filing does not provide a clear full-year earnings or EPS guidance figure. Management expected the adverse metal inventory cost overlap in Consumer Packaging to lessen beginning in Q2 2023.
- In January 2023, Sonoco sold its S3 business for $13.8m cash proceeds, recognized an $11.1m pretax gain and held $1.5m in escrow. It may receive a further $3.2m in 2024 if conditions are met.
- Sonoco sold approximately 55,000 acres of timberland in March for $70.8m net proceeds and recognized a $60.9m pretax gain. The sale followed conversion of its Hartsville paper machine to recycled paperboard production.
- The planned $330m purchase of the remaining 65% of RTS Packaging and a Chattanooga paper mill remained subject to regulatory review, including a DOJ information request. The company anticipated closing in the second half of 2023, subject to conditions, and expected to use new borrowings and cash.
- Restructuring included closure of the Hutchinson, Kansas paper mill and elimination of approximately 159 positions. Sonoco expected about $5.2m of additional charges for previously announced actions, mostly incurred and paid by year-end 2023; further restructuring remained possible.
- Key exposures include input and energy prices, ability to pass costs through, demand and volume, labor and supply disruptions, interest and foreign-exchange movements, geopolitical conditions, and execution of acquisitions and restructuring. Management identified near-term goodwill impairment risk at Plastics–Healthcare and Protexic if performance or long-term outlook weakens.
- Environmental contingencies accrued were $7.2m. The company said it did not believe the cited environmental matters or other ordinary-course legal proceedings were reasonably likely to have a material adverse effect; ultimate environmental costs remain uncertain.
Investor verification priorities
- Assess underlying operating performance separately from the $72.0m divestiture and asset-sale gains; compare GAAP results with the company’s adjusted measures and their exclusions.
- Monitor Consumer Packaging margins and the timing and size of the metal inventory cost overlap, alongside demand and volume trends.
- Track Industrial Paper Packaging volume, pricing and cost trends, and the company’s cash conversion and working-capital needs.
- Verify RTS transaction approval, closing timing, funding and expected effect on leverage and results.
- Review debt maturities, variable-rate exposure, revolver availability and covenant headroom as financing costs and capital spending evolve.
- Follow restructuring cash costs, potential additional actions, goodwill assumptions for the named reporting units, and resolution of environmental and tax contingencies.