Sonoco Products Company — Q1 2021 Form 10-Q
Reporting period: Three months ended April 4, 2021; comparisons are with the three months ended March 29, 2020. Sonoco provides consumer and industrial packaging, protective packaging, and related services. Interim financial statements were reviewed, not audited.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $1,353.3 million | $1,303.3 million |
| Gross profit / margin | $277.9 million / 20.5% | $266.6 million / 20.5% |
| Operating profit / margin | $120.3 million / 8.9% | $130.1 million / 10.0% |
| Net income attributable to Sonoco | $72.3 million | $80.4 million |
| Diluted EPS | $0.71 | $0.80 |
| Operating cash flow | $138.7 million | $87.7 million |
| Capital expenditures | $39.5 million | $33.9 million |
| Cash and cash equivalents at period end | $587.5 million | $564.8 million at Dec. 31, 2020 |
Net cash provided by operating activities less capital expenditures was approximately $99.2 million. Total current and long-term debt was approximately $1.696 billion at quarter end; cash-adjusted debt was approximately $1.108 billion. Sonoco reported $500 million of committed revolving-credit availability and approximately $444 million of scheduled debt maturities over the next 12 months. The quarterly dividend was $0.45 per share.
Management’s non-GAAP “Base” results were net income attributable to Sonoco of $91.7 million, or $0.90 per diluted share, versus $95.3 million, or $0.94, a year earlier. These figures exclude specified restructuring, pension, transaction, divestiture, and other items.
Changes versus the prior comparable period
- Sales increased 3.8%, reflecting higher volume/mix, selling prices, and foreign exchange, partly offset by acquisitions and divestitures. Two additional invoicing days benefited the quarter.
- GAAP net income attributable to Sonoco fell 10.1%; operating profit declined 7.5%. Higher SG&A, including acquisition and divestiture costs, and a $5.5 million U.S. display-and-packaging divestiture loss weighed on results.
- Base earnings declined 3.8%, primarily due to lower Base operating profit and higher net interest expense. Management cited negative price/cost effects and earnings lost from the European contract-packaging divestiture, partly offset by productivity and volume gains.
- Operating cash flow rose $51.0 million, largely because working capital used less cash year over year. Investing cash use was $39.0 million; financing cash use was $69.8 million.
Segments and operating developments
- Consumer Packaging: Sales rose 7.8% to $582.8 million; segment operating profit rose 18.6% to $75.6 million. Margin improved to 13.0% from 11.8%, supported by volume, productivity, Can Packaging, and positive price/cost.
- Industrial Paper Packaging: Sales rose 12.5% to $565.4 million, but segment operating profit fell 15.8% to $50.2 million. Margin declined to 8.9% from 11.9%, as higher recovered-paper, freight, and other costs outweighed productivity and volume gains.
- All Other: Sales fell 21.2% to $205.2 million and operating profit fell 32.5% to $13.9 million, primarily reflecting the European contract-packaging divestiture and negative price/cost effects.
Outlook, risks, and unusual items
- Management expected the pandemic to have a mixed demand impact in Q2, with a net negative effect on consolidated earnings versus pre-pandemic levels; sequential Q2 effects were expected to be similar to, or slightly better than, Q1. No specific full-year earnings guidance is provided in the filing text.
- Management expected rising recycled fiber, resin, freight, and other costs to pressure Q2 price/cost relationships. It planned to pursue contractual pass-throughs and price increases, while noting that recovery may be partial or delayed.
- 2021 capital spending was forecast at approximately $300 million, including about $85 million for Project Horizon, a paper-machine conversion and mill optimization project.
- The U.S. display-and-packaging business was sold for $80 million; net proceeds of $79.7 million were received April 5, after quarter end. The company recorded a $5.5 million pretax loss and said proceeds would be used for general corporate purposes. Sonoco had exited display and packaging following this and its 2020 European divestiture.
- Sonoco expected approximately $150 million of additional Q2 contributions to fund termination of its inactive pension plan; $50 million was contributed April 28. It expected approximately $560 million of noncash pretax settlement charges in Q2. Additional contributions to other pension and postretirement plans of about $14 million were anticipated for the remainder of 2021.
- Goodwill impairment tests found no impairment, but management identified Conitex, Retail Packaging, and Plastics–Healthcare as at risk if operating expectations, recovery, price/cost conditions, or valuation assumptions worsen.
- Other uncertainties include COVID-19 and supply-chain disruption, raw-material and energy prices, inflation, foreign exchange, and tax matters. Environmental contingency accruals were $8.1 million; management did not expect the cited matters to have a material adverse effect. Management reported disclosure controls were effective as of April 4, 2021.
- After quarter end, the Board authorized up to $350 million of share repurchases, and Sonoco commenced a tender offer for up to $300 million principal amount of its 5.75% notes due 2040. These were subsequent events, not Q1 cash transactions.
Investor verification priorities
- Track whether announced pricing and surcharges offset inflation in recycled fiber, resin, freight, and other inputs, particularly in Industrial Paper Packaging.
- Verify execution of Q2 pension-plan settlements, the expected funding requirement, and the approximately $560 million settlement charge.
- Assess cash deployment and liquidity after pension funding, near-term debt maturities, the 2040-note tender offer, capital spending, and the new repurchase authorization.
- Monitor the three goodwill-sensitive reporting units against management’s recovery and margin assumptions.
- Reconcile GAAP results with “Base” non-GAAP results and assess the continuing impact of divestitures and transaction-related costs on comparisons.