Sonoco Products Company — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 27, 2020; comparisons are with the quarter ended September 29, 2019. Nine-month figures compare the periods ended on those dates. Dollar amounts below are in millions unless stated otherwise. The interim financial statements were reviewed, not audited.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,312.3 | $1,353.9 | $3,861.1 | $4,065.4 |
| Gross profit | $257.0 | $265.5 | $771.6 | $810.9 |
| Gross margin | 19.6% | 19.6% | 20.0% | 19.9% |
| Operating profit | $106.7 | $138.5 | $340.6 | $385.2 |
| Net income attributable to Sonoco | $83.4 | $92.1 | $219.1 | $246.9 |
| Diluted EPS | $0.82 | $0.91 | $2.17 | $2.44 |
| Operating cash flow | — | $489.5 | $238.8 | |
| Capital expenditures | — | $116.7 | $147.0 |
Management’s non-GAAP “Base” diluted EPS was $0.86 for Q3 versus $0.97, and $2.59 for the first nine months versus $2.78. These adjusted figures exclude specified items and should not be confused with GAAP EPS.
Liquidity and other financial position
- At September 27, cash and equivalents were $782.7 million; total debt was $2.136 billion, including $509.0 million classified as current and $1.627 billion long term.
- The company had $500 million available under its revolving credit facility and approximately $760 million of scheduled maturities through December 2021. It reported covenant interest coverage and net worth substantially above required minimums.
- After quarter-end, Sonoco repaid $200 million of Wells Fargo term debt and $100 million of U.S. Bank term debt using cash on hand.
- Operating cash flow increased by $250.7 million year over year, largely because the prior-year period included $200 million of voluntary pension contributions. Investing cash use was $157.1 million; financing provided $311.4 million.
- Quarterly dividend was $0.43 per share. The October 19, 2020 declaration set another $0.43 dividend, payable in December.
Material changes and segment performance
- Q3 sales declined 3.1%; management attributed the change principally to lower volume/mix ($54 million), lower selling prices ($6 million), and foreign currency and other effects ($11 million), partly offset by $29 million from acquisitions. Nine-month sales fell 5.0%.
- Q3 operating profit fell 23.0%, and GAAP diluted EPS declined from $0.91 to $0.82. Nine-month GAAP net income attributable to Sonoco was down 11.3%.
- Q3 segment operating profit rose in Consumer Packaging (+19.7%), Display and Packaging (+20.9%), and Protective Solutions (+25.2%); Paper and Industrial Converted Products fell 42.2%. The latter faced weak volumes and higher recovered-paper costs, with segment margin down to 7.5% from 12.0%.
- Consumer Packaging benefited from productivity, acquisitions and food-packaging demand; its Q3 margin improved to 11.6% from 9.8%. Display and Packaging also improved margin, to 7.8% from 6.1%, despite weaker sales. Protective Solutions rebounded from Q2 pandemic lows and reported a 13.3% Q3 margin versus 10.6%.
- Q3 restructuring and asset impairment charges were $24.1 million versus $6.6 million; nine-month charges were $59.6 million versus $30.6 million. The 2020 charges included facility closures, severance and a $14.9 million impairment tied mainly to perimeter-of-the-store business consolidation.
Outlook, risks and unusual items
- Management expected COVID-19 to have a net negative effect on consolidated Q4 earnings, with mixed demand by business: food packaging supported by at-home consumption, continued weakness in industrial markets and retail displays, and further recovery in automotive and appliance-related Protective Solutions, tempered by seasonality.
- Management expected recycled-fiber prices to stabilize around Q3 averages in Q4, but noted that higher year-over-year fiber costs and lower market pricing continued to pressure Paper and Industrial Converted Products. It planned continued cost reductions and expected approximately $6 million of additional charges on previously announced restructuring actions, mostly by year-end 2020.
- The company forecast 2020 capital spending of approximately $180 million, including about $20 million on a currently estimated $113 million project to convert and modernize a Hartsville paper machine. Capital spending in 2021 was expected to exceed normal levels.
- In September the board approved a sale of the European contract packaging business; on October 9, Sonoco agreed to sell it for $120 million, subject to debt, working-capital and foreign-exchange adjustments and regulatory approval. Closing was expected in Q4 2020. Assets of $202.1 million and liabilities of $93.8 million were classified as held for sale. The sale was not classified as a discontinued operation.
- The held-for-sale classification led to a $20.4 million deferred-tax-liability write-down, contributing to a Q3 GAAP effective tax rate of negative 0.8%. The nine-month GAAP effective rate was 18.6%; the Base rate was 25.6%.
- Sonoco expected approximately $150 million of additional pension-plan contributions in 2021 and approximately $590 million of noncash, pretax settlement charges as the terminated inactive plan’s remaining obligations are settled. Amounts and timing depend on participant settlements and market conditions; PBGC approval and plan processes remain relevant.
- No goodwill impairment was recorded in the Q3 annual test. Management identified near-term impairment sensitivity in Display and Packaging and Conitex: estimated fair-value cushions were 5.2% and 6.9%, respectively. A weaker or delayed recovery in Conitex, customer losses, or changes in assumptions could lead to impairment.
- COVID-19 resurgence, renewed restrictions, recession, customer demand, supply-chain disruptions, raw-material and energy costs, foreign exchange, debt and pension funding needs, and execution of restructuring and the planned sale are key stated uncertainties. Environmental contingencies accrued were $8.2 million; the company did not believe resolution of disclosed environmental or other ordinary-course legal matters was reasonably likely to have a material adverse effect.
Most important facts to verify
- Whether the European contract-packaging sale closed, its final proceeds after adjustments, and its effect on reported results and liquidity.
- Actual Q4 demand, price/cost trends—especially recovered fiber—and the extent to which productivity and cost actions offset weaker markets.
- Execution and cash costs of restructuring, the Hartsville capital project, and the expected 2021 pension contribution and settlement charges.
- Whether the goodwill outlook and valuation assumptions for Display and Packaging and Conitex change as the pandemic recovery and customer demand evolve.
- Debt repayments, maturities, cash generation and covenant headroom following the post-quarter repayment of $300 million of term loans.