SONOCO PRODUCTS CO quarterly report, Q3 FY2021

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Sonoco Products Company — Q3 2021 Form 10-Q

Reporting period: Three and nine months ended October 3, 2021; comparisons are with periods ended September 27, 2020. Amounts below are in U.S. dollars and millions unless otherwise noted. Sonoco supplies consumer and industrial packaging and related products. Its reporting segments are Consumer Packaging, Industrial Paper Packaging, and All Other.

Financial performance and position

  • Third-quarter revenue and earnings: Net sales rose 7.8% to $1,415.2 million. GAAP operating profit increased to $126.5 million from $106.7 million; net income attributable to Sonoco was $111.1 million, or $1.12 per diluted share, versus $83.4 million, or $0.82. Gross profit was nearly flat at $257.7 million, while gross margin declined to 18.2% from 19.6% as selling-price increases did not fully offset inflation.
  • Third-quarter adjusted results: Management’s non-GAAP “Base” net income attributable to Sonoco was $90.6 million, or $0.91 per diluted share, compared with $87.0 million, or $0.86. Base operating profit fell 6.2% to $122.4 million. These measures exclude specified items and are not GAAP results.
  • Nine-month results: Sales increased 7.5% to $4,151.3 million. GAAP operating profit was $382.1 million versus $340.6 million, but Sonoco reported a GAAP net loss attributable to the company of $150.6 million, or $1.51 per diluted share, compared with net income of $219.1 million, or $2.17. Base net income rose 1.7% to $266.9 million, or $2.66 per diluted share, from $262.5 million, or $2.59.
  • Major unusual item: The nine-month GAAP loss included a $547.3 million noncash pretax pension settlement charge from settling the Sonoco Pension Plan for Inactive Participants. Total after-tax non-base charges were $417.5 million. The quarter’s GAAP tax rate was unusually low at 2.3%, including a $30.0 million tax benefit related to amendment of the 2017 U.S. tax return; the nine-month GAAP effective tax rate was 37.0%.
  • Segments, third quarter: Consumer Packaging sales increased 9.7%, but segment operating profit declined 5.4% and margin fell to 10.2% from 11.8%. Industrial Paper Packaging sales increased 29.5%, operating profit increased 30.0%, and margin was 8.4%. All Other sales declined 34.4% and operating profit declined 67.5%, primarily reflecting the display and packaging divestitures and cost pressure.
  • Cash flow and investment: Nine-month operating cash flow was $220.1 million, down from $489.5 million. Capital expenditures were $156.6 million. Operating cash flow was affected by substantially higher pension contributions and increased working-capital use. Cash and cash equivalents fell to $160.0 million from $564.8 million at year-end 2020.
  • Debt and liquidity: Total debt was $1,468.5 million at October 3, 2021, including $202.0 million of commercial paper. Sonoco had a $750 million committed revolving facility, with $548 million available after commercial paper, and approximately $275.8 million of scheduled debt maturities over the next 12 months. Management said cash, available credit, and expected cash flows provide ample liquidity; the company reported covenant measures substantially above minimum requirements.
  • Capital returns and pension funding: Sonoco paid $134.6 million in dividends during the nine months and spent $159.7 million on share repurchases in financing cash flows, including a $150 million accelerated repurchase. It contributed $142.6 million to benefit plans, including $133 million to fund the inactive-plan settlement.

Changes, outlook, and risks

  • Sales growth reflected higher selling prices, volume/mix improvement, foreign exchange, and the Can Packaging acquisition, partly offset by divestitures. Inflation in raw materials and other costs outpaced price recovery in several businesses, pressuring margins. Management cited productivity gains and recovering demand as partial offsets.
  • For Q4 2021, management expected sales to be flat or somewhat higher than Q3 and expected overall price/cost improvement, while warning that inflation and supply-chain disruptions would continue to challenge operating profit. Consumer Packaging was expected to face seasonal volume declines and price/cost pressure; Industrial Paper Packaging was expected to have a modestly positive price/cost relationship.
  • Management said the global display and packaging exits would continue to weigh on year-over-year comparisons through Q1 2022. It also expected recovery in several All Other markets, with some demand constrained by supply issues and seasonal effects.
  • The company completed a third-quarter goodwill impairment test and recorded no impairment. However, goodwill in Plastics–Healthcare was identified as at risk if recovery, margins, or other valuation assumptions underperform; its estimated fair value exceeded carrying value by 13.3% in the latest test.
  • Other risks include raw-material, energy, labor, and transportation inflation; the ability to pass costs through to customers; COVID-19 effects on demand and supply chains; foreign-exchange and commodity exposure; and execution of restructuring and capital projects. Environmental contingencies accrued were $7.4 million; management did not believe identified environmental or other legal matters had a reasonable possibility of materially adversely affecting the financial statements.
  • Restructuring charges are recurring. The company expected approximately $1.8 million of additional charges for previously announced actions, mostly by year-end 2021, and said further actions may be undertaken. Management disclosed no material change in market-risk exposure and concluded disclosure controls were effective as of period-end. The auditor performed a review, not an audit, of the interim financial statements.

Important facts for investors to verify

  1. Whether price increases and productivity can sustainably offset inflation and restore segment margins, particularly in Consumer Packaging and All Other.
  2. How much of the reported GAAP-to-Base earnings gap is recurring, and the assumptions behind management’s non-GAAP adjustments.
  3. Cash conversion, working-capital requirements, planned capital spending, debt maturities, and continued access to commercial-paper and revolver funding.
  4. Plastics–Healthcare operating performance and the goodwill impairment sensitivity disclosed by management.
  5. Progress on restructuring, pension obligations, and the expected duration of divestiture-related comparison effects.